Life Assurance Plans SLOC With-Profits Fund bonus rates from 1 April 2016 Why are we sending you this brochure? This brochure accompanies your Annual Statement, providing you with further information to help you understand how we set the bonus rates for your plan. Throughout this brochure we refer to the SLOC With-Profits Fund as the With-Profits Fund. This brochure provides information on: how we manage the With-Profits Fund; the bonus rates effective from 1 April 2016; the long-term investment strategy and the asset allocation as at 31 December 2015; and the performance of the With-Profits Fund and the key factors that have affected this. This brochure only provides information on the With-Profits Fund. It is not written to provide you with advice on the suitability of your plan. For advice on your plan, please speak to your financial adviser. Life s brighter under the sun
2 1. How we manage the With-Profits Fund Your with-profits plan is invested in the With-Profits Fund. This means it shares in the profits and losses of the fund. We carefully manage the investment performance of the fund and monitor its profits and losses so that when we decide on a new bonus rate, we can make sure that the allocation to plan-holders is fair. The With-Profits Fund invests in a mixture of assets such as company shares, fixed interest bonds (loans to government or companies), property and cash. The mix of these investments is intended to provide a balance between the potential for growth in the longer-term while not undermining the security of the fund for plan-holders. The With-Profits Fund pools the money from all other plan-holders. We manage the fund to provide all plan-holders with a fair allocation of the profits that have been earned over the term of their plan. This means that we are able to smooth (see below) the allocation of profit over time to help protect plan-holders from the volatility of investment returns over the short-term. About smoothing: With-profits investments include a special feature called smoothing, which is your cushion against the short-term ups and downs of investment markets. The main aim of smoothing is to reduce the effect of investment market fluctuations on what you get back from your plan. Smoothing, however, cannot protect against the impact of persistent low investment returns. We manage the With-Profits Fund on behalf of our plan-holders who share in all the profits of the fund. All of the profits arising in the fund are for the benefit of the plan-holders. Our shareholders do not take any profit from the fund.
3 2. Distribution of the surplus assets and the financial strength of the With-Profits Fund The financial strength of the With-Profits Fund has improved considerably over the past few years as a result of changes to the investment strategy, along with some positive contribution from favourable investment performance. As a result, the Board decided to distribute a proportion of the fund s surplus assets to plan-holders by increasing the amount of assets allocated to endowment and whole-life plans by 5% in 2015 in addition to the 7.5% increase made in 2014. The fund remains in a strong position and most of the endowment policies will end in the next five years. To treat all plan-holders, including those near to maturity, fairly, the Board has decided to distribute a further proportion of the fund s surplus assets to plan-holders by increasing the amount of assets allocated to endowment and whole-life plans by 1.75%. This distribution results in higher terminal bonus rates for most endowment and whole-life plans from 1 April 2016 (see section 3). This improvement to benefits is not guaranteed and can be reversed in sufficiently adverse circumstances.
4 3. The bonus rates effective from 1 April 2016 This section provides details about the bonus rates for the With-Profits Fund, effective from 1 April 2016. Bonuses vary according to the type of plan you have and the date it started. They will be shown on your Annual Statement. We declare bonus rates normally once a year, in April. However, we may make changes to the bonus rates at other times, in exceptional circumstances. There are two types of bonuses: Reversionary bonus this may be added to your plan each year. Recurring reversionary bonus rates are relatively stable from year to year and are not expected to change significantly except in adverse conditions. Reversionary bonuses increase the guaranteed minimum amount that we will pay on your plan s maturity or if you should die. Once a reversionary bonus is added to the guaranteed minimum amount we cannot take it away. Terminal (or final) bonus this may be added on top of the reversionary bonuses when the plan comes to an end. The intention is that this is a balancing payment so that we pay plan-holders a fair share of the fund s assets. The terminal bonus payable on any plan may go up or down over time, and could be zero. A key principle for us in deciding the amount of bonus the fund can afford to pay is to firstly make sure there is enough money in the fund to pay the existing guaranteed benefits to our plan-holders. This includes the amounts we have guaranteed to pay on death or maturity plus any reversionary bonuses that are already allocated. The level of any terminal bonus payable depends on a number of factors. These include: how investment returns have built up over the years; the deductions we make to pay for the running costs of the fund; and the effect of smoothing (explained earlier).
5 Reversionary bonus rates The table below shows the reversionary bonus rates from April 2016 that apply to traditional endowment and whole-life plans. We have not changed the reversionary bonus rates for any plans from last year. Date plan started % sum assured % of previously applied reversionary bonuses After 1 September 1974 0% 0.25% Before 1 September 1974* 0% or 0.25% * 0.25% or 0.75% * *Actual bonus rate will depend on plan type and premium series, please see your Annual Statement. Terminal bonus rates All terminal bonuses are calculated as a percentage of the sum assured plus the reversionary bonus which has been added to the plan each year. We work out the percentage based on the type of plan and the number of complete years since the plan started. Endowment plans The most important factor affecting the terminal bonus rates for endowment plans is the investment performance of the assets in the fund over the past year (please see section 5). The values for plans maturing from 1 April 2016 are higher than the future values projected last year. The terminal bonus amounts for your plan will be shown on your Annual Statement. The table below shows the terminal bonus rates for endowment plan payouts on maturity or on death from April 2016. Note that these rates take account of the distribution of the fund s surplus assets as described in section 2. Years since issue 20 25 30 35 40 45 Endowment plans 38% 42% 42% 49% 63% 79%
6 Whole-life plans The most important thing affecting the terminal bonus rates is the expected long-term investment performance of the assets held in the fund for these plans. These have decreased primarily because of the reduction in the long-term investment return available on UK bonds. This decrease has been balanced by the increase in market values of the fund s assets and the distribution of the fund s surplus assets. This has resulted in the whole-life terminal bonus rates from April 2016 being higher than those projected last year. The terminal bonus amounts for your plan are shown on your Annual Statement. The table below shows the terminal bonus rates for whole-life plan pay-outs on death from April 2016. Years since issue 20 25 30 35 40 45 Whole-life plans 5% 14% 23% 33% 35% 44%
7 Terminal bonus calculation on maturity We have provided an example below of how we would work out the terminal bonus for a 25 year endowment plan with a sum assured of 10,000, maturing on 1 April 2016, with an existing reversionary bonus of, for example, 4,133. Please note that the sum assured in this example appears as the sum insured on plan statements for low cost, low start and build-up endowments. First we would work out any additional reversionary bonus. As the plan started in 1991 we would apply a 0% reversionary bonus on the sum assured and a 0.25% reversionary bonus on the existing reversionary bonus (see earlier reversionary bonus rate table). Then, we would work out the terminal bonus. As this is a 25 year endowment plan we would apply a terminal bonus of 42% of the sum assured plus the reversionary bonus (see earlier terminal bonus rate table). 10,000 Sum assured The basic amount paid on maturity or death. + 4,133 Existing reversionary bonus This is the amount of reversionary bonus which has been added to the plan since it started. + 0 Additional reversionary bonus on sum assured We work this amount out by multiplying the reversionary bonus rate on sum assured (0%) by the sum assured ( 10,000). In this example, this is zero. + 10 Additional reversionary bonus on existing reversionary bonus We work this amount out by multiplying the reversionary bonus rate on reversionary bonus (0.25%) by the existing reversionary bonus amount ( 4,133). This is 10. Adding this to the existing reversionary bonus and the additional reversionary bonus on sum assured brings the total reversionary bonus to 4,143. + 5,940 Terminal bonus We work this amount out by firstly multiplying the terminal bonus rate (42%) by the sum assured of 10,000 = 4,200, then multiplying the terminal bonus rate (42%) by the total reversionary bonus of 4,143 = 1,740 and adding these two figures together. = 20,083 Final payout Surrender values For endowment plans we have not changed the basis for calculating surrender values. We have increased the surrender values for some whole-life plans. This is to ensure plan-holders who leave the fund early continue to be paid their fair share of fund assets and to make sure there is fair treatment between groups of plan-holders. The reversionary bonus, terminal bonus and surrender value amounts for your plan will be shown on your Annual Statement.
8 4. Investment strategy and asset allocation This section explains our investment strategy for the With-Profits Fund and the asset allocation of the fund on 31 December 2015. Our first priority is to make sure that the fund will be in a position to meet its guarantees to you and other plan-holders. The safest way of securing those guarantees is by investing in UK government and other high quality bonds. When we are satisfied that the guarantees are adequately secured, we are able to invest in assets such as company shares and property, which have the potential to earn higher returns, but which also carry higher risks. We invest in a diversified portfolio that strikes a balance between providing the highest potential investment return and protecting the financial position of the fund. We review investment strategy at least yearly but may do so more often if market conditions change sharply. The investment mix will change over time. The effective actual asset allocations for the assets backing endowment and whole-life plans as at 31 December 2015 are shown in the graph below: 9% 17% 74% Fixed interest * Company shares Property * Fixed interest (including cash and other assets, such as plan loans and mortgages).
9 5. Investment market overview This section gives a general overview of investment markets over 2015, the specific type of assets in which the With-Profits Fund invests and the key factors that have affected these assets. Market overview International equity and property assets performed well over the year. UK equity and fixed interest markets were broadly flat.
10 Asset types The With-Profits Fund is primarily invested in the fixed interest, company shares and property. Fixed Interest We invest in UK government bonds, other bonds, and mortgages. They are referred to as fixed interest investments because we know the income that we expect to receive from them, although their market value will change over time. These investments are loans to the UK government and also to companies that are raising money. Company bonds usually pay a higher rate of interest than loans to the government. During 2015, fixed interest investment returns were flat. Company Shares We invest in the shares of a wide range of UK and international companies. Owning these shares means that the fund is a part-owner of these companies and so receives a portion of their profits. These profits are paid as dividends and are received as income into the With-Profits Fund. Changes in the market values of these shares are reflected in the overall value of the With-Profits Fund. During 2015, company share market performance was mixed with global shares outperforming UK shares (4.8% versus 1.0%). Property We invest in and manage a property fund that enables us to access investments in a range of commercial property. These investments usually receive income in the form of rents. The value of the underlying properties may also go up or down. During 2015, property market performance was strong with returns of around 15%. Source: State Street
11 6. How the With-Profits Fund has performed This section provides information on the With-Profits Fund performance and the actions we have taken to manage the assets in the fund in 2015. The net return of the fund (after tax and investment expenses) for 2015, before the distribution of any surplus assets, was 2.3%. The fund s performance, although very strong, was slightly below the benchmark set for the fund. This was mainly driven by the under-performance of UK shares relative to the benchmark. Even after this consideration, the fund still maintains considerable holdings in company shares and property. The table below shows the investment returns achieved on the With-Profits Fund over the past seven years. These returns relate to the fund as a whole and do not apply to any individual plan. They are shown after allowing for tax and investment expenses. 2009 2010 2011 2012 2013 2014 2015 5.2% 8.7% 7.5% 6.6% 2.5% 10.2% 2.3% The amount you will eventually receive from your plan is not linked directly to short term fluctuations in the value of assets in the With-Profits Fund. Past performance is not a guide to future performance. The final value of a with-profits investment depends on future bonuses which cannot be guaranteed.
7. Would you like to know more about the With-Profits Fund? We produce a document called The Principles and Practices of Financial Management ( PPFM ) for the With-Profits Fund. It provides a detailed explanation of how we manage the fund. We also produce a Consumer Guide for the fund which provides a briefer explanation of how we manage the fund. During 2015 we updated the PPFM and Consumer Guide to include minor clarifications, but we did not make any changes to the actual principles. In April 2015 we published our 2014 annual report to with-profits plan-holders. This report explains how we have complied with our PPFM during 2014. We will publish the 2015 annual report in April 2016. For a copy of these documents, or if you need any further information, please call us on 0345 072 0223 or 01256 841414 or visit www.sloc.co.uk Sun Life Assurance Company of Canada (U.K.) Limited, incorporated in England and Wales, registered number 959082, registered office at Matrix House, Basing View, Basingstoke, Hampshire, RG21 4DZ, trades under the name of Sun Life Financial of Canada and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SL3518-03/16 MC00000313/0317 Life s brighter under the sun