(applicable to with-profits business issued by the prudential group to uk policyholders) · ·...

Principles & Practicesof Financial Management(Applicable to With-Profits business issuedby the Prudential Group to UK policyholders)

Principles & Practices of Financial Management 3

Introduction 6

A Purpose of the PPFM 6

B Principles and Practices 7

C Structure of the Prudential Group 8

C1Company Structure 8

C2 Structure of PAC 8

C2.1 With-Profits Sub-Fund (WPSF) 9

C2.2 Scottish Amicable Insurance Fund (SAIF) 10

C2.3 Defined Charge Participating Sub-Fund (DCPSF) 11

C2.4 Non-Profit Sub-Fund (NPSF) 12

C2.5 Prudential Hong Kong Limited (PHKL) 12

C3 Information about relevant Companies (other than PAC) 12

C3.1 Scottish Amicable Life plc (SAL) 12

C3.2 Prudential (AN) Limited (PANL) 12

C3.3 Prudential International Assurance plc (PIA) 12

D Conduct of Business Sourcebook (COBS) – operation of with-profits business 13

E Policyholder and shareholder interests in the WPSF 14

F Risk management of PAC 14

G Governance arrangements for with-profits business 15

Index

4 Principles & Practices of Financial Management

Principles and Practices of Financial Management 16

1. Determining With-Profits Policy Values 16

1.1 Introduction 16

1.2 Principles 17

1.3 Practices 18

1.3.1 Pay-out values 18

1.3.2 Regular Bonus Rates 18

1.3.3 Final Bonus Rates 19

1.3.4 Smoothing of Maturity and Death Benefits 19

1.3.5 Target ranges for Maturity Benefits 20

1.3.6 Surrender Values and Market Value Reductions (MVRs) 20

1.3.6.1 Accumulating with-profits policies 20

1.3.6.2 Conventional with-profits policies 20

1.3.6.3 Target ranges for surrender benefits 21

1.3.7 Asset share approach 21

1.3.7.1 Overview 21

1.3.7.2 Investment Return 21

1.3.7.3 Tax 21

1.3.7.4 Guarantees and Smoothing 22

1.3.7.5 Mortality and Morbidity 22

1.3.7.6 Shareholder Profit 22

1.3.7.7 Miscellaneous Profits and Losses 23

1.3.7.8 Expenses and Commission 23

1.3.8 Significant variations in practice for specific types of PAC policy 23

1.3.8.1 Business originally issued by Scottish Amicable Life plc (SAL) 23

1.3.8.2 With-Profits Annuity 24

1.3.8.3 Defined Charge Participating Sub-Fund (DCPSF) business (non ELAS) 24

1.3.8.4 Defined Charge Participating Sub-Fund (DCPSF) business (ELAS) 24

1.3.8.5 PruFund Range of Funds 26

1.3.8.6 Income Choice Annuity 27

1.3.9 New bonus series 28

1.4 Variations for Scottish Amicable Insurance Fund (SAIF) and Scottish Amicable Account (SAA) with-profits policies 30

2. Investment strategy 30

2.1 Introduction 30

2.2 Principles 30

2.3 Practices 30


3. Business Risks 33

3.1 Introduction 33

3.2 Principles 33

3.3 Practices 34

4. Charges and Expenses 35

4.1 Introduction 35

4.2 Principles 35

4.3 Practices 35

5. Management of the Inherited Estate 36

5.1 Introduction 36

5.2 Principles 37

5.3 Practices 37

6. Volumes of new business and arrangements on stopping new business 39

6.1 Introduction 39

6.2 Principles 39

6.3 Practices 40

7. Equity between with-profits policyholders and shareholders 40

7.1 Introduction 40

7.2 Principles 40

7.3 Practices 41

Appendix A – SAIF Principles of Financial Management 42

Appendix B – ELAS With-Profits Annuities – Principles of Financial Management 44

Appendix C – PruFund Range of Funds 54

Appendix D – Summary of Abbreviations 56

Glossary 57


A Purpose of the PPFMAll firms that carry out with-profitsbusiness in the UK are required todefine, and make publicly available, thePrinciples and Practices of FinancialManagement (PPFM) that are applied inthe management of their with-profitsfunds. Prudential is committed toproviding open and honestcommunications and we believe that thePPFM will help with that aim.

In managing with-profits business, firmsrely on their ability to use discretion,particularly in relation to the investmentstrategy adopted, and the smoothing andbonus policies used. The purpose ofPrudential’s PPFM is therefore to:

> explain the nature and extent of thediscretion available;

> show how competing or conflictinginterests or expectations of

− different groups and generationsof policyholders, and

− policyholders and shareholders,

are managed so that policyholdersand shareholders are treated fairly;and

> give a knowledgeable observer (e.g. aFinancial Adviser) an understanding ofthe material risks and rewards fromstarting and continuing an investmentin a with-profits policy with Prudential.

The PPFM covers all with-profits policiesissued in the UK by:

> companies in the Prudential Group(i.e. by The Prudential AssuranceCompany Limited (PAC), ScottishAmicable Life plc (SAL) which weretransferred to PAC with effect from 31 December 2002, Prudential (AN)Limited (PANL) which weretransferred to PAC with effect from 31 October 2010, and PrudentialInternational Assurance plc (PIA)), and

> Scottish Amicable Life AssuranceSociety which were transferred to PACwith effect from 30 September 1997.

The PPFM also covers the with-profitsannuity business that was transferredfrom The Equitable Life AssuranceSociety (ELAS) to PAC with effect from31 December 2007. For this purpose, thedefinition of business transferredincludes any business which wasexcluded from the transfer, but whichwas reinsured from ELAS to PAC on thebasis that it would be dealt with as if ithad been transferred.

In general, the Principles and Practicesset out in the PPFM do not apply to theoverseas business written in PAC’sbranches in Poland, France and Malta.They do, however, apply to off-shorebusiness reinsured into PAC by PIAand Canada Life Assurance EuropeLimited (CLE).

To fully understand the risks and rewards

of effecting or holding a Prudential with-profits policy, the reader should read thewhole PPFM and not just selectedsections. In particular, Principles shouldbe read with their associated Practices(see section B below). However, thePPFM is not a comprehensive explanationeither of the management of the with-profits business of the Prudential Groupor of every matter which may affect that business.

Statements within the PPFM are by theirnature forward-looking statements that aresubject to a variety of uncertainties; thisdocument should be read in that context.In addition, no part of the documentshould be read as a recommendation topolicyholders or potential policyholders ortheir advisers in relation to effecting ormaintaining a with-profits policy.Accordingly, any person consideringwhether to effect or maintain a with-profits policy with any member of thePrudential Group should seek financialadvice.

None of the contents of this documentforms part of, or varies, the terms orconditions of any policy issued by anymember of the Prudential Group. In the event of any inconsistency betweenthe contents of this document and anypolicy, the terms and conditions of thepolicy prevail.


B Principles and PracticesIn the PPFM we define the Principles andPractices used in managing the UK with-profits business of PAC, which includesoff-shore business acquired by orreinsured into the company (see sectionC below) by PIA and CLE.

> The Principles define the overarchingstandards adopted in managing PAC’swith-profits business to maintain thelong-term solvency of the fund forcurrent and future policyholders anddescribe the approach used:

− in meeting our duty to with-profitspolicyholders, and

− in responding to longer-termchanges in the business andeconomic environment.

> The Practices describe the approachused:

− in managing PAC’s with-profitsbusiness, and

− in responding to changes in thebusiness and economicenvironment in the shorter-term.

The contents of the PPFM are normallyreviewed on a half-yearly basis. Thecontents of the PPFM may be amendedfollowing such a review, either as thecircumstances of the Prudential Groupchange or business or economicenvironments alter, or to reflect newproduct launches, or to reflect changes inthe management of the with-profitsbusiness. Any proposed changes arereviewed by PAC’s With-ProfitsCommittee (WPC) (details of which aregiven in section G below) and are subjectto approval by the PAC Board.

In normal circumstances we would expectto give affected policyholders writtennotice at least 3 months in advance of theeffective date of any material change tothe Principles. However, there may becircumstances when changes will be madewithout notice with the agreement of ourregulators, the Financial ConductAuthority (FCA) and Prudential RegulatoryAuthority (PRA), or their successors.

We expect our Practices to be revisedfrom time to time as both circumstancesand the business environment change.We will notify affected policyholders in areasonable period after the effective dateof any such change, generally in theirnext annual statement.

The most important aspects of the PPFMhave been summarised in customerfriendly form called a Consumer FriendlyPPFM (CFPPFM). We have a smallnumber of different versions, eachappropriate to particular products. All UKwith-profits policyholders who receivedan annual statement following theFebruary 2006 bonus declaration, and allnew UK with-profits policyholders from 1 January 2006, received or will receive aCFPPFM. Policyholders will subsequentlybe notified of any significant changes inthe relevant CFPPFM made as a result ofchanges to the PPFM.


The Prudential Assurance Company Limited (PAC)

With-Profits Fund

Non-Profit Sub-Fund (NPSF)

"0:100"

General InsuranceFund "0:100"

Other "0:100"With-ProfitsSub-Fund (WPSF)

“90:10”

Scottish AmicableInsurance Fund(SAIF) "100:0"

Defined ChargeParticipating Sub-Fund

(DCPSF) "100:0"

This diagram does not indicate relative sizes.

Prudential plc also owns, directly or indirectly, various investment management companies including Prudential PortfolioManagement Group, M&G, PPM America, M&G Real Estate and Eastspring Investments (Asia). A large part of PAC’s assets aremanaged by these companies.

* Some Partly OwnedCompanies shown in bold are referred to in this document

UK: Prudential Pensions Limited (PPL)

EU: Prudential International Assurance plc (PIA)

HK: Prudential Hong Kong Limited (PHKL)

Prudential General Insurance Hong Kong Limited (PGHK)

The Prudential Assurance Company Limited (PAC)

USA: Jackson National Life

Asia: Various Insurance Operations*

Prudential plc

C Structure of the Prudential GroupC1Company Structure

Prudential plc owns, directly or indirectly, all or part of a number of insurance companies which are shown below, as well as anumber of other types of company which are not shown.

C2 Structure of PAC

PAC is a proprietary company, the shares of which are wholly owned by Prudential plc. PAC’s principal activities are with-profits andnon-profit life and pensions insurance business. For with-profits business, there are three sub-funds, the With-Profits Sub-Fund(WPSF), the Scottish Amicable Insurance Fund (SAIF) & the Defined Charge Participating Sub-Fund (DCPSF) described inparagraphs C2.1 to C2.3, which are collectively referred to as the With-Profits Fund throughout this document. PAC also conductssome general insurance business outside the With-Profits Fund.


PAC’s life and pensions business istransacted mainly in the UK and ispredominantly with-profits.

The UK with-profits business consists of business:

> written directly in PAC,

> transferred into PAC from the ScottishAmicable Life Assurance Society(SALAS) on 30 September 1997 andfrom SAL on 31 December 2002,

> transferred into PAC from ELAS on 31 December 2007, and

> transferred into PAC from PANL on31 October 2010.

PAC also contains with-profits businesswritten outside the UK, comprisingbusiness:

> written by branches of PAC in Poland,France and Malta,

> reinsured into PAC by

– other Prudential Group insurancecompanies, such as PIA, or

– Canada Life Assurance (Europe)Ltd (see paragraph C3.3 below),and

> written by branches of ELAS andtransferred into PAC from ELAS on 31 December 2007.

With-profits business is written in theWith-Profits Fund and consists of with-profits policies which share in the divisibleprofit of PAC as determined each year inaccordance with the company’s Articlesof Association. The constituents of thedivisible profit and the proportionattributable to policyholders may vary byproduct type; the proportion attributableto policyholders in the With-Profits Sub-Fund (see paragraph C2.1 below) may be

varied by the company over time. TheWith-Profits Fund is divided into sub-funds to facilitate the management of thevarious risk-bearing and profit-sharingarrangements that apply.

The profits (if any) available topolicyholders and/or shareholdersvary between the sub-funds asdescribed below.

C2.1 With-Profits Sub-Fund (WPSF)

The With-Profits Sub-Fund (WPSF)consists mainly of with-profits business,which is/was written by:

> PAC, both Ordinary Branch (including Poland and Malta) andIndustrial Branch,

> SAL, and transferred into PAC, and

> PANL, and transferred into PAC.

The WPSF also contains a significantamount of non-profit business, whichconsists of:

> non-profit annuity business that hasarisen from with-profits pensionpolicies that were originally written inthe WPSF,

> non-profit immediate and deferredannuities originally written byPrudential Annuities Limited (PAL)and transferred into the WPSF,

> other non-profit (including unit-linked) business written by PAC thatis not allocated by the Directors to theNon-Profit Sub-Fund (see paragraphC2.4 below), and

> certain types of business originallywritten by SALAS and now containedin the Scottish Amicable Account(SAA), which are:

− the unitised with-profits lifebusiness, other than itsinvestment content which was

transferred to the ScottishAmicable Insurance Fund (SAIF)(see paragraph C2.2 below),

− the non-profit life business, and

− the unit-linked life business.

Prior to 1 October 2014, the WPSFowned PAL, a subsidiary companywriting non-profit annuity business. PAL was established in 1992, but closedto new business in July 2004 as a result of the WPSF reaching its risk limits inrelation to the credit and longevity risksassociated with non-profit annuitybusiness. The long-term insurancebusiness of PAL was transferred to theWPSF on 1 October 2014.

The WPSF contains the PAC inheritedestate. This is the amount of money inthe sub-fund in excess of that which theDirectors of PAC expect to be paid out tomeet obligations to existing policyholders(see sections D and E below). Thebusiness written by PAC’s Polish andMaltese branches is treated on equalterms with PAC’s UK business in relationto the support it receives from the PACinherited estate.

Divisible profit arising in the WPSF,including profit that arises on the non-profit business, is divided between with-profits policyholders and shareholders.The Articles of Association permit up to 5%of the divisible profit to be transferred to acontingency fund before the balance isdivided between policyholders andshareholders. The proportion of divisibleprofit attributable to with-profitspolicyholders in the WPSF is defined bythe Articles of Association as being at least90%, with the balance attributable toshareholders. For virtually all business, thepolicyholders’ proportion is currently 90%.Thus the WPSF is a “90:10” sub-fund.


C2.2 Scottish Amicable InsuranceFund (SAIF)

SAIF is a closed sub-fund that containsthe bulk of the business originally writtenby SALAS and acquired by PAC on 30September 1997. It contains:

> SALAS’s pensions and annuitybusiness (with-profits and non-profit),

> SALAS’s conventional with-profits lifebusiness, and

> the investment content of SALAS’sunitised with-profits life business.

The balance of SALAS’s business wastransferred to the WPSF and is allocatedto the SAA. As the with-profitsinvestment element of SAA policies

(i.e. the accumulation of premiums lesscharges) is invested in SAIF, it is managedwith all other SAIF with-profits policies.

SAIF also contains the SAIF inheritedestate. This inherited estate consists ofassets in the sub-fund over and abovethe amounts that we would normallyexpect to pay out over time, if the sub-fund had remained open to newbusiness, to SAIF and SAA policyholdersas claim values (see PPFM paragraph5.1.2). Under the terms of the SALASScheme, the SAIF inherited estate will bedistributed to with-profits policyholdersas an addition to the with-profits benefitsarising in SAIF, including those relating toSAA policies.

SAIF is provided with financial supportfrom the WPSF by means of the ScottishAmicable Capital Fund (SACF), in returnfor an annual charge. SACF is treated aspart of the free assets of SAIF for thepurposes of setting SAIF’s bonus andinvestment policy. However, SACF remainsin the WPSF and does not form part of theSAIF inherited estate. SACF cannot exceed15 per cent of the with-profits assets inSAIF and will reduce in size as the SAIFsub-fund reduces as a result ofpolicyholder payouts. SACF would beused to fund any deficit in the SAIF bonussmoothing account in accordance with theSAIF Principles of Financial Management(PFM) set out in the Scheme thattransferred SALAS into PAC. ThesePrinciples are set out in Appendix A.

Non-Profit Liabilities

Ex-SALAS business in the Scottish Amicable Account (SAA)

> Unitised with-profits life (excl. investment content)

> Non-profit life

> Unit-linked life

PAC Inherited EstateScottish Amicable Capital Fund

Ex-SALAS Liabilities(with-profits and non-profit)

> Pensions business

– with-profits

– non-profit

– unit-linked

> Life business

– conventional with-profits

– unitised with-profits (investment content only)

SAIF Inherited Estate

WPSF SAIF

This diagram does not indicate relative sizes.

Elements of SAIF and the WPSF that are relevant to SALAS business are shown in the diagram below:


The Scheme which transferred SALASinto PAC states that the ScottishAmicable Funds (i.e. SAIF and SACF)must be managed in accordance with thespecified SAIF PFM. These Principles:

> include the over-arching provisionthat the Scottish Amicable Fundsshould be managed in a sound andprudent fashion,

> provide a framework for settingbonus and investment policy for theScottish Amicable Funds on a basisthat is fair to both SAIF and SAApolicyholders and other PACpolicyholders, and

> require that the SAIF inherited estatebe distributed over time to with-profits policyholders in SAIF and SAA.

The whole of the profit arising in SAIF,including profits or losses on its non-profit business, will be allocated to with-profits policyholders in SAIF and SAA(i.e. SAIF is a “100:0” sub-fund).

C2.3 Defined Charge ParticipatingSub-Fund (DCPSF)

The Defined Charge Participating Sub-Fund (DCPSF) consists of two types of business.

The first type of business is theaccumulated investment content ofpremiums paid (i.e. the accumulation ofpremiums less explicit charges) in respectof the Defined Charge Participatingbusiness, which is either:

> reinsured into PAC from PIA or othercompanies, or

> written through PAC’s French branch(between 1 January 2001 and 31December 2003).

This business is defined as with-profitsbusiness on which policyholders incuronly the charges stated explicitly in thepolicy (which include an annualmanagement charge on the assets heldwithin the DCPSF). The charges on thereinsured PIA business accrue to PIA,which bears all of the correspondingexpenses. The charges on the PACFrance Branch business accrue to theNon-Profit Sub-Fund (NPSF), which bearsall of the corresponding expenses.Hence, the shareholders receive anyprofits or losses arising from thedifference between the charges andexpenses on this business.

Bonus smoothing accounts for businessreinsured in from PIA, and for businesswritten by the French branch, aremaintained in the inherited estate withinthe WPSF. These bonus smoothingaccounts are credited or debited asappropriate with any difference betweenclaim payments made from the DCPSFand the relevant policies’ underlyingasset shares. For International PrudenceBond and Prudential InternationalInvestment Bond business invested in thePruFund Range of Funds (as defined inparagraph 1.3.8.5), the smoothingaccounts are credited or debited asappropriate with any difference betweenthe unit price and the net asset value perunit when units are created or cancelledas a result of premiums being received orclaims being paid. It is intended thatthese smoothing transfers shouldgenerate no net gain to either sub-fundover the long term.

The second type of business in theDCPSF is the with-profits annuitiesbusiness transferred from ELAS on31 December 2007.

For this business, the charges taken aredefined within the ELAS Scheme oftransfer. There is a 1% per annumdeduction from the gross investmentreturn credited to asset shares. Thischarge accrues to the NPSF, which bearsall expenses; hence the shareholdersreceive any profits or losses arising fromthe difference between this charge andthe expenses (including the capitalcharge payable by the NPSF to theWPSF) on this business. In addition,there is a maximum deduction of 0.5%per annum from the gross investmentreturn per annum for the expected costof guarantees. This charge accrues to theinherited estate within the WPSF, whichbears the cost of the guarantees; hencethe inherited estate within the WPSFreceives any profits or losses arising fromthe difference between this charge andthe actual cost of guarantees.

A separate bonus smoothing account forthis business is maintained in the inheritedestate within the WPSF. It is intended thattransfers to and from this account shouldgenerate no net gain or loss to either theWPSF or DCPSF over the long term.Further information on the operation ofthe bonus smoothing account is includedin paragraph 1.3.8.4 of this document.

The profits allocated to the transferringELAS annuities arise from the investmentreturns earned on the underlying assetshares (less the charges described above).

The profit in the DCPSF arises solely frominvestment performance and is entirelyattributable to DCPSF policyholders (i.e.the DCPSF is a “100:0” sub-fund).


C2.4 Non-Profit Sub-Fund (NPSF)

The NPSF consists of such non-profit andunit-linked business as has been explicitlyallocated to this sub-fund by the Directors.

It also includes non-PIA Defined ChargeParticipating business, excluding thebusiness which was transferred fromELAS. The investment content of theDefined Charge Participating businessheld in the NPSF is allocated to theDCPSF. All charges for the DefinedCharge Participating business held in theNPSF are credited to the NPSF, whichbears all of the expenses of this business.

For the business transferred from ELAS(and which is allocated to the DCPSF), theNPSF is credited with the value of a 1%per annum deduction from the grossinvestment return credited to the ELASasset shares and bears all the expenses ofthis business. The NPSF pays an annualcharge to the PAC inherited estate withinthe WPSF for the use of the economiccapital supporting the business transferredfrom ELAS. This charge is calculated as0.14% per annum of asset shares.

All the profit of the NPSF is attributable to shareholders (i.e. the NPSF is a“0:100” sub-fund).

C2.5 Prudential Hong Kong Limited(PHKL)

Following court approval in Hong Kongand the UK, on 1 January 2014, PACtransferred its existing Hong Kongbranch business to two new Hong Kongincorporated Prudential companies, oneproviding life insurance and oneproviding general insurance, so that theHong Kong business could work moreclosely with Prudential’s other Asianoperations. Following the transfer, PAC ceased to write business in HongKong. All Hong Kong based business

sold from 1 January 2014 is writtendirectly into the Hong Kong incorporatedPrudential companies.

Life insurance policies that were originallytaken out by customers of PAC’s HongKong branch were transferred to the newHong Kong based life insurance company,Prudential Hong Kong Limited (PHKL),together with an appropriate amount ofPAC's assets and liabilities. In practicalterms, since the Hong Kong branch hadboth with-profit and non-profit policies, anappropriate amount was transferred fromboth the WPSF and the NPSF, asnecessary, to cover the requisite assetsand liabilities of those policies. As part of the transfer, Prudential split the inherited estate of the WPSF andtransferred an appropriate amount of it toPHKL. PHKL is a wholly owned subsidiaryof PAC.

The WPSF contains certain non-profitannuity business that was previouslyreinsured to PAL by the WPSF but wasrecaptured in August 2011. In order toachieve an equitable sharing of the risksand rewards of this business betweenPAC and PHKL, as part of the HongKong transfer, a reinsurancearrangement was put in place on 1January 2014 between PAC and PHKLwhereby PAC reinsured a proportionateshare of the PAL and recaptured PALbusiness to PHKL. Following the transferof the long-term insurance business ofPAL to the WPSF on 1 October 2014,this business, which is now in the WPSF,remains reinsured to PHKL.

Following the transfer, the vast majorityof the PAC With-Profits Fund remains inthe UK and in particular, neither SAIF northe DCPSF was split.

General insurance policies sold by theHong Kong branch were transferred toPrudential General Insurance Hong KongLimited (PGHK).

C3 Information about relevantCompanies (other than PAC)

C3.1 Scottish Amicable Life plc (SAL)

SAL was a wholly owned subsidiary of PACuntil it was liquidated in 2011. SAL wroteunit-linked, non-profit and with-profitsbusiness from 1 October 1997 until 31December 2002. At 31 December 2002, its business was transferred into the NPSFwith the with-profits element allocated tothe WPSF. All references in this PPFM toWPSF with-profits business apply to SALwith-profits business unless there is aspecific reference to SAL business.

C3.2 Prudential (AN) Limited (PANL)

PANL was a wholly owned subsidiary ofPAC until it was liquidated in 2012. PANLwrote new with-profits life business from10 December 2002 to 11 August 2004and wrote unit-linked pensions businessuntil 31 October 2010. At 31 October2010 its with-profits business wastransferred into the WPSF and its non-profit business was transferred into theNPSF. Prior to the transfer, its with-profitsbusiness was wholly reinsured to theWPSF and its policies shared in thedivisible profits of the WPSF alongsidePAC policies. All references in this PPFMto WPSF business also apply to thetransferred PANL with-profits business.

C3.3 Prudential InternationalAssurance plc (PIA)

PIA is a wholly owned subsidiary of PACwhich has transacted Defined ChargeParticipating business since March 2002.All of PIA’s with-profits policies(including those written in Germanywhich were transferred to Canada Life


Assurance (Europe) Ltd with effect from1 January 2003) are reinsured into PAC.The investment content of the reinsuredbusiness is invested in the DCPSF. PIAand CLE pay an annual charge to the PACinherited estate within the WPSF for theuse of the economic capital supportingthis business.

D Conduct of BusinessSourcebook (COBS) – operationof with-profits business”The operation of with-profits business isregulated by the rules and guidance setout in Chapter 20 of the Conduct ofBusiness Sourcebook (COBS) of the FCAHandbook (formerly the FinancialServices Authority). With effect from 1 April 2012, the FSA (our regulator atthat time) made certain changes to therules and guidance set out in Chapter 20of COBS in relation to protecting with-profits policyholders. PAC soughtclarification from the FSA following thesechanges and received IndividualGuidance in relation to the factors it isrequired to take account of on twospecific issues:

> the writing of new business; and

> setting the risk appetite of its With-Profits Fund.

Following handover from the FSA to theFCA, the FCA confirmed during 2013that the Individual Guidance previouslyissued by the FSA remained valid.

On the first issue of factors relevant tothe writing of new business, the FSAconfirmed that PAC is not generallyconstrained in its use of the inheritedestate to support the writing of newbusiness by any requirement to take intoaccount the prospect that existingpolicyholders may otherwise have of

receiving a distribution, or a greaterdistribution, from the inherited estate.The FSA, however, identified thefollowing as constraints on the use of aninherited estate by a with-profits firmsuch as PAC:

> writing new business that is priced onterms that are unlikely to allow theproducts to be self-supporting overtheir duration;

> writing new business that at the timeit is written is self-supporting but willnot foreseeably be sold in sufficientquantities such that the economicvalue of the future margins expectedto emerge is not enough to cover thecosts incurred in acquiring thebusiness; and

> writing new business in volumes thatincrease at such a rapid rate that inthe long term it has an adverse effecton a firm’s financial strength.

In applying the above constraints on theuse of an inherited estate for writing newbusiness, the FSA noted that aproprietary with-profits fund such asPAC’s is not required to take account ofthe tax liability arising on transfers toshareholders from the fund. The FSAfurther clarified that new business is notrequired to be self-supporting in theperiod temporarily following a materialchange in the business environment thatis outside of a firm’s control.

On the second issue, the FSA confirmedthat in setting risk appetite anddetermining its approach to the cost ofguarantees for its with-profits fund, PACis generally not required to take intoaccount the prospect of existingpolicyholders receiving a distribution out of the inherited estate. However, the

FSA identified the following factors asrelevant to the setting of a with-profitsfund’s risk appetite in this context:

> risk appetite should be understood tomean a firm’s long term targetposition for the strength of its with-profits fund, underpinning its bonusand investment policy, which inconjunction with its available workingcapital, defines its ability to take riskfrom time to time;

> the risk appetite of a with-profits fundsuch as PAC’s has to have regard notonly to the financial strength of thefund, but also to representations that have been made by a firm to policyholders;

> whilst there is no requirement to takeaccount of any interest ofpolicyholders in a distribution ofexcess surplus when setting the riskappetite of a with-profits fund such asPAC’s, a firm should not deliberatelyset or change its approach to riskappetite in order to prevent theemergence of excess surplus; and

> if a policy contains a guarantee, thepricing of the product should makeproper allowance at the time it iswritten for the foreseeable cost of the guarantee(s).

Taking into account the IndividualGuidance received from the FSA referredto above, PAC believes that its With-ProfitsFund complies with the rules and guidancein Chapter 20 of COBS. PAC will thereforeinterpret the COBS rules and guidance,and operate the With-Profits Fund, havingregard to the Individual Guidance. Thecomments made in sections E and F belowtake into account the Individual Guidance,and the discussions that accompanied it.


E Policyholder and shareholderinterests in the WPSFPAC is, and always has been, a proprietarycompany, and the whole of the WPSF islegally and beneficially owned by PAC.

PAC’s WPSF includes an inherited estate.This is the amount of money in the sub-fund in excess of that which PAC expectsto pay out to meet its obligations toexisting policyholders.

The inherited estate represents the majorpart of the working capital of the WPSF. Itis available to support both current andfuture new business in PAC’s with-profitssub-funds, and is used to provide solvencysupport, to allow investment freedom forpolicyholders’ asset shares, and to providethe smoothing and guarantees associatedwith with-profits business. The Directorsseek to manage the PAC inherited estateso that it continues to provide adequateworking capital for the future security andongoing solvency of PAC’s with-profitsbusiness. There is no specific target for thesize of the PAC inherited estate.

Whilst the WPSF remains open and theinherited estate remains fully utilised insupporting current and expected futurenew business, PAC believes thatpolicyholders’ reasonable expectations,and the fair treatment of policyholders,requires that:

(i) policyholders should receive benefitsin line with smoothed asset shares (asdefined in section 1 of the PPFM), orguaranteed benefits if higher, and

(ii) PAC should seek to manage its with-profits business in such a way as tomaintain a strong enough inheritedestate in the WPSF to help protect thesecurity of policyholders’ contractualbenefits, and to allow the continuation

of investment freedom, smoothing andthe meeting of guarantees. It should benoted that, although PAC seeks tomaintain a strong inherited estatethrough the prudent management ofthe risks that it takes on, a reduction inthe size of the inherited estate as aproportion of the WPSF couldnevertheless occur, for example as aresult of adverse market conditions.

In the circumstances where the inheritedestate is fully utilised in supporting currentand expected future new business, PACdoes not consider that policyholders haveany expectation of a distribution of theinherited estate, other than through thenormal process of smoothing and meetingguarantees in adverse investmentconditions. In addition, and as is set out inmore detail in sections 5 and 6 of thePPFM, in such circumstances PAC is not:

(i) required to take into account in settingrisk appetite, and in its approach to thecosts of guarantees, the prospect ofexisting policyholders receiving adistribution out of the inherited estate;or

(ii) constrained in the use of the inheritedestate to support the writing of newbusiness by a requirement to take intoaccount the prospect that existingpolicyholders might otherwise have ofreceiving a distribution, or a greaterdistribution, from the inherited estate.

The approach taken by PAC in relation toconflicts of interest between policyholdersand shareholders in relation to themanagement of the inherited estate isdescribed in section 7 of the PPFM.

The WPSF exists for the purpose of writingnew with-profits business, and managingthe risks inherent in this business for the

benefit of both policyholders andshareholders. On this basis, PAC continuesto write new with-profits business, and tomanage the associated risks within thewith-profits sub-funds, providing that theDirectors of PAC are satisfied that the newbusiness is properly priced, the risks areproperly managed, and the new businessis likely to have no adverse impact on thereasonable benefit expectations of thecompany’s in-force policyholders.

F Risk management of PACIn managing risk, the PAC Board isresponsible for:

(i) determining the company’s riskappetite which, in conjunction with theavailable working capital, determinesthe company’s risk capacity from timeto time, and

(ii) determining the financial managementframework within which the overall risklevel of the company is managed,having regard to that risk capacity, and

(iii) managing the overall risk level of thecompany and the With-Profits Fund,including its three sub-funds, havingregard to that risk capacity and thefinancial management framework.

The WPSF’s risk appetite defines therange of acceptable levels for the sub-fund’s financial strength, and,together with the financial managementframework, underpins how PAC managesits with-profits business, including settingbonus and investment policy (asdescribed in sections 1 and 2 of thePPFM) and the maximum limits, if any,which may be placed on new businessvolumes (as described in section 6 of thePPFM). The risk appetite and financialmanagement framework thereforeprovide the context within which


decisions in relation to the managementof PAC’s with-profits business, includingthose which may involve conflicts ofinterest between policyholders andshareholders, are taken. Since, asdiscussed in section C above, the DCPSFand SAIF rely on the WPSF’s inheritedestate for capital support, decisions takenby PAC’s Directors regarding the WPSF’srisk appetite, risk capacity and risk level may affect all of PAC’s with-profitspolicyholders.

The WPSF’s risk appetite is set havingregard to policyholders’ reasonableexpectations, based on PAC’s policydocuments, marketing information andother relevant materials. As noted insection E above, whilst the WPSF remainsopen and the inherited estate continues tobe fully utilised in supporting current andexpected future new business, PAC doesnot consider policyholders’ reasonableexpectations to extend to any expectationof a distribution of the inherited estate,other than through the normal process ofsmoothing benefits and meetingguarantees in adverse investmentconditions. Consequently, when settingthe WPSF’s risk appetite, PAC is notrequired to take into account the prospectof existing policyholders receiving adistribution out of the PAC inheritedestate. Although the firm’s risk appetite isnot set having regard to policyholders’contingent interest in any possibledistribution, or greater distribution, of theinherited estate, neither is it set so as todeliberately prevent any possibility of sucha distribution being made.

The WPSF’s risk appetite may be amendedin response to significant changes in thecompany’s long-term financial strength orbusiness environment (such as following achange in the WPSF’s regulatory solvency

requirements). However, the Directorswould consider with-profits policyholders’reasonable expectations at the time ofmaking any change.

With-profits policyholders may beexposed to a range of business andinvestment risks specific to the type ofproduct held; further details are providedin various sections of the PPFM as follows:

> The overall risk level of the With-Profits Fund reflects bothinvestment risk and business risks,which are described in sections 2and 3 respectively.

> The level of investment-related riskfor all business depends on the extentto which the future asset and liabilitycash flows may differ, including theextent to which the capital value ofassets may differ from the value ofthe underlying policy guaranteeswhen those assets are realised to paypolicy benefits. For with-profitsbusiness, this risk is closely inter-related with the bonus distributionpolicy which is described in section 1.

> The risk capacity of the With-ProfitsFund depends on the amount ofworking capital available, which isprovided primarily by the PACinherited estate as described insection 5.

> The amount of working capitalrequired is affected by the type andvolume of new business written, asdescribed in section 6.

The key risk for the With-Profits Fundresults from holding a high proportion ofreal assets (e.g. equities and property) toback smoothed liabilities whichincorporate guarantees (mainly in theform of basic sums assured and theaccumulated regular bonus additions).

As discussed in section 5, the PACinherited estate provides capital supportfor both UK and overseas business, andthe risk level of the WPSF thus reflectsthe aggregate risk level of all of the sub-fund’s with-profits business, includingthat arising in its overseas branches. TheDirectors of PAC seek to ensure the fairtreatment of policyholders in eachterritory, including that:

(i) the business written in each territoryhas a similar aggregate level ofrisk, and

(ii) an appropriate proportion of theinherited estate (which will generallybe held in the UK) is denominated inthe currency of the relevant territory.

G Governance arrangements forwith-profits business In addition to its other responsibilities,the PAC Board is responsible for themanagement of the company’s with-profits business, including investmentand bonus distribution policy. However,the SALAS Scheme established theScottish Amicable Board to beresponsible for the management(including investment and bonus policy)of the Scottish Amicable Funds. TheSALAS Scheme also requires that aMonitoring Actuary be appointed inorder to advise the Scottish AmicableBoard as to the proper operation of theScottish Amicable Funds in order tosafeguard the interests and reasonableexpectations of policyholders invested in SAIF.


In line with industry-wide regulatoryrequirements, the PAC Board hasappointed:

> a Chief Actuary that provides the PACBoard with certain actuarial advice,and fulfills various statutory dutiesunder the new regulatory reportingregime introduced on 1 January 2016,

> a With-Profits Actuary, who reviewsmaterial relevant to the operation ofthe with-profits business, with thespecific duty to advise the PAC Boardon the reasonableness of howdiscretion has been exercised inapplying the PPFM and how anyconflicting interests have beenaddressed, and

> a With-Profits Committee (WPC),comprising at least three members, all of whom are independent ofPrudential, which provides anindependent assessment of the wayin which Prudential manages its with-profits business and how Prudentialbalances the rights and interests ofpolicyholders and shareholders inrelation to its With-Profits Fund.

The company prepares an annual reportto with-profits policyholders setting outhow it has complied with the PPFM. Thisreport, which is available on request andat www.pru.co.uk/ppfm, includesdetails of how discretion has beenexercised, how any conflicts of interestbetween different groups or generationsof policyholders, and betweenpolicyholders and shareholders, havebeen addressed and a report from theWith-Profits Actuary which stateswhether he or she considers that thereport and the discretion exercised bythe company in the year may beregarded as taking policyholders’interests into account in a reasonable and proportionate manner.

The WPC has the duty to report to thePAC Board, providing an assessment ofcompliance with the PPFM and how anyconflicting rights have been addressed. Ifthe WPC wishes to make a statement towith-profits policyholders in addition tothe company’s report described above,the company will make that reportavailable. In addition, under the Schemethat transferred ELAS business to PAC,the WPC has responsibility for theapplication of some elements ofdiscretion as defined by the Scheme.

Principles and Practices of Financial Management

Section 1 – DeterminingWith-Profits Policy Values1.1 Introduction

1.1.1 The amount of profit available for distribution among with-profitspolicyholders and shareholders, thedivisible profit, is determined annually by the Directors of PAC in accordancewith its Articles of Association.Policyholders receive their distribution of profits by means of bonuses, or other methods as specified in therelevant policy documentation.

1.1.2 Accumulating with-profitspolicyholders (i.e. holders of unitised andcash accumulation products, excludingPruFund) and conventional with-profitspolicyholders receive their share of thedivisible profit by way of bonuses whichare declared, generally yearly, in thefollowing form:

> a regular bonus (also known as anannual or reversionary bonus) whichmay be added during the lifetime of a policy, so gradually increasing theguaranteed benefits, for example thebenefit payable on death, and

> a final bonus (also known as aterminal or additional bonus) whichmay be added to policies when aclaim is paid in a specified period.

The rates of regular and final bonusdeclared are generally different for eachtype of policy. Final bonus rates for eachtype of policy generally vary by referenceto the period, usually a year, in which the policy commenced or each premiumwas paid.

The bonus rates applied to the with-profits annuities transferred from ELASconsist of a regular bonus which is usedto determine the guaranteed annuity, anda combination of an Overall Rate ofReturn (ORR) and an Interim Rate ofReturn (IRR) which is used to determinethe non guaranteed annuity. For thisbusiness the bonus rates do not varyaccording to the period in which thepolicy commenced. Depending on thelevel of regular bonus, ORR and IRRdeclared, the guaranteed annuity andnon-guaranteed annuity may fall afterapplication of the Anticipated Bonus Rate(ABR), and in respect of the non-guaranteed annuity, the GuaranteedInterest Rate (GIR).

PruFund policyholders receive their shareof the divisible profit by means of anincrease in the unit price at the ExpectedGrowth Rate applicable to the selectedfund, subject to adjustments when theunit price moves outside specified limits.Further information on Expected GrowthRates and the returns received byPruFund policyholders is given inparagraph 1.3.8.5 below.

The bonus rates applied to the IncomeChoice Annuity take the form of aSmoothed Return that is used todetermine the non-guaranteed incomeand, if applicable, any increase in theguaranteed income (the Secure Level) as described in paragraph 1.3.8.6.


1.1.3 A bonus becomes a contractualright only when it has been added to apolicy but it remains subject to thePrinciples and Practices set out below(see in particular paragraph 1.3.6).

1.1.4 This section sets out the Principlesand Practices we use to work out thepay-out values including:

> the methods we use to work out theamount to pay to with-profitspolicyholders,

> the approach we take when we setregular bonus rates.

> the approach we take when we setfinal bonus rates, and

> the approach we take when we setExpected Growth Rates for PruFundbusiness.

1.1.5 The practices set out in paragraphs1.3.1 to 1.3.7 below cover the majority ofwith-profits policies. There are somedifferences in approach for:

> SAIF with-profits policies,

> SAA with-profits policies, and

> some other types of with-profitspolicy, namely:

− policies originally issued by SAL,

− with-profits annuities,

− policies in the DCPSF,

− policies invested in the PruFundRange of Funds, and

− Income Choice Annuity.

Significant differences in practices aresummarised in paragraph 1.4 for SAIFand SAA policies, and in paragraph 1.3.8for other with-profits policies.

1.2 Principles

1.2.1 The company seeks to treat all with-profits policyholders fairly. We aim toprovide:

> pay-out values on death or maturity that are fair between different policy typesand different generations of policyholder, and

> pay-out values on surrender, transfer or retirement (other than at the selectedretirement date) that are also fair between those policyholders leaving and thoseremaining in the sub-fund.

1.2.2 Pay-out values are managed through the bonus declaration process (oralternative profit distribution mechanisms as described in the policy document), withadjustments for surrender and transfer values being made through Market ValueReductions (MVRs) or the surrender value bases, as appropriate.

The main objectives of the company’s bonus distribution policy are:

> to give each with-profits policyholder a return on the premiums paid reflectingthe return on the underlying investments over the time the policyholder has heldthe policy, smoothing the peaks and troughs of investment performance, and

> to ensure that with-profits policyholders in each sub-fund receive a fair share of theprofits distributed from that sub-fund by way of bonus additions to their policies.

1.2.3 To retain flexibility in our investment policy and to protect the With-ProfitsFund, for most types of with-profits product we aim to keep a substantial proportionof pay-out values in non-guaranteed form (i.e. payable as final bonus) and determineregular bonus rates accordingly.

1.2.4We set pay-out values by reference to the earnings of the underlyinginvestments, except where guaranteed minimum benefits increase the total amountpayable.

1.2.5 Final bonus rates are set so that in normal investment conditions pay-outvalues change only gradually over time (i.e. we provide smoothed benefits). Ourapproach to smoothing is not dependent on the type of claim except when an MVRis applied or a change in surrender bases is made.

1.2.6 Our intention is that smoothing profits and losses should balance out overtime, so that in the long run with-profits policyholders in each sub-fund, or within aproduct group with a specific smoothing account, neither gain nor lose as a result ofour smoothing policy. The cumulative cost of smoothing is monitored. The short-term cost of smoothing is constrained only by the impact that smoothing costs haveon the risk level of the sub-fund and hence on the security and reasonable benefitexpectations of continuing policyholders.

1.2.7 Any change to the company’s objectives and the methods used to achievethem, or any material change to the historical assumptions or parameters relevant tothose methods (for example, previously applied investment returns, charges, orallocations of miscellaneous surplus), will be made as and when they are consideredto be appropriate and compatible with treating customers fairly, and only with theapproval of the Directors. Any change in respect of SAIF or SAA policies would alsobe approved by the Scottish Amicable Board and, in addition, court approval may berequired if the SAIF Principles of Financial Management need to be changed. Certainchanges in respect of the with-profit annuities transferred from ELAS would require


in investment returns associated withinflation rates that were generally lowerthan had been experienced in the 1970sand 1980s.

1.3.2.2 Regular bonus rates aredeclared, normally in February, for theforthcoming bonus declaration year for:

> all WPSF unitised with-profitsproducts (except SAA and SALunitised life with-profits products),

> DCPSF unitised with-profits products,and

> SAIF unitised with-profits pensionproducts.

These bonuses are added daily to eachpolicy but the rates of future accrual maybe changed at any time during the bonusdeclaration year.

Regular bonus rates are declared,normally in February, in respect of theprevious calendar year for:

> WPSF conventional with-profitsproducts,

> SAA and SAL unitised life with-profitsproducts,

> SAIF conventional with-profitsproducts, and

> With-profit annuities transferred from ELAS.

For these latter products (except thosewith-profit annuities transferred fromELAS) an interim bonus rate is alsodeclared for claims arising after the endof the calendar year but prior to thedeclaration for that year. For annuitiestransferred from ELAS, an IRR is declared

review and approval by the With-ProfitsCommittee, and in certain circumstancescourt approval may be needed.

1.3 Practices

1.3.1 Pay-out values

1.3.1.1 To meet our objectives for pay-out values, we target them on the assetshares (see paragraph 1.3.7) of samplepolicies or groups of sample policies. Ingeneral, and where appropriate, eachsample policy represents only thosepolicies which share a common rate offinal bonus (i.e. policies of a particulartype which were either issued in thesame year or for which a premium waspaid in that year). However, where suchsample policies would each represent acomparatively small number of policies,we produce scales of final bonus ratesthat are targeted on the aggregate assetshares across groups of sample policies.Asset shares are calculated for allsignificant blocks of business.

1.3.1.2 The asset share of a samplepolicy is a fair value of the assets backingthe policy, and is calculated byaccumulating the premiums paid (lessallowance for expenses and/or charges)at the actual rates of investment returnearned on the underlying assets over thelifetime of the policy (allowing for theeffect of tax on the investment returnsand of tax relief on expenses for lifebusiness), making appropriate allowancefor miscellaneous profits and losses.

1.3.1.3 When the Ordinary Branch (OB)assets and the Industrial Branch (IB)assets were merged in 1988, thecompany undertook to link IB policybonuses to OB policy bonuses as follows:

> for IB policies issued before July1988, total bonus additions will not beless than 90% of those oncorresponding OB policies; and

> for IB policies issued from July 1988,total bonus additions will be 100% ofthose on corresponding OB policies.

Hence IB pay-out values depend on thecorresponding OB pay-out values and donot reflect the IB asset shares, unless theIB value would produce a higher amountfor business issued before July 1988. Therelationship between IB and OB assetshares is reviewed annually.

1.3.2 Regular Bonus Rates

1.3.2.1 Rates of regular bonus aredetermined for each type of policyprimarily by targeting them at a prudentproportion of the long-term expectedfuture investment return on theunderlying assets. The expected futureinvestment return is reduced asappropriate for each type of policy toallow for items such as expenses,charges, tax and shareholders’ transfers.However, the rates declared may differby product type, or by date of paymentof the premiums or date of issue of thepolicy, if the accumulated annual bonusesare particularly high or low relative to aprudent proportion of the achievedinvestment return.

When target bonus levels change, thePAC Board has regard to the overallfinancial strength of the With-ProfitsFund when determining the length oftime over which it will seek to achieve theamended prudent target bonus level.Regular bonuses were gradually reducedbetween 1991 and 2004 to reflect the fall


which is intended to give credit for theexpected investment return after the end of the calendar year until the nextpolicy anniversary.

For WPSF cash accumulation products,the regular bonus rates declared,normally in February, apply for the yearending on the scheme revision datewhich falls in the next bonus year.

1.3.2.3 In normal investmentconditions, we expect changes to regularbonus rates to be gradual over time andchanges are not expected to exceed 1%p.a. over any year. However, theDirectors retain the discretion whether ornot to declare a regular bonus each year,and there is no limit on the amount bywhich regular bonus rates can change. Ifthe WPSF was operating materiallyoutside of its risk appetite, the PAC Boardwould expect to take a range ofmanagement actions to address this.Reductions in annual bonuses wouldtypically be one of the actions that wouldbe taken.

1.3.3 Final Bonus Rates

1.3.3.1 A final bonus, which is normallydeclared yearly, may be added when aclaim is paid, or when units of a unitisedproduct are realised.

> Final bonus scales for WPSF andDCPSF unitised with-profits productsand all SAIF and SAA products maybe varied at any time. In particular,additional bonus declarations toreduce these bonus scales might benecessary (as part of a range ofmanagement actions) if the WPSFwas operating materially outside of itsrisk appetite.

> Final bonus scales for WPSFconventional with-profits products aredeclared for policies becoming claimsin the forthcoming bonus period,usually a year.

1.3.3.2 The rates of final bonus usuallyvary by type of policy and by referenceto the period, usually a year, in which thepolicy commenced or each premium waspaid. These rates of final bonus aredetermined by reference to the assetshares for the sample policies or groupsof sample policies described in paragraph1.3.1.1, but subject to the smoothingapproach described in paragraphs1.3.4.1, and 1.3.4.2.

In general the same final bonus scaleapplies to maturity, death and surrenderclaims except that:

> the total surrender value may beimpacted by the application of anMVR (for accumulating with-profitsbusiness) and is affected by thesurrender bases (for conventionalwith-profits business), and

> for SAIF and SAA policies, andpolicies transferred from SAL, thefinal bonus rates applicable onsurrender may be adjusted to reflectexpected future bonus rates.

Further details are given in paragraphs1.3.6 and 1.3.8.1 below.

1.3.3.3 There may be an additionalbonus on retirement for certainconventional with-profits deferredannuity contracts. Any additional bonus,which is dependent on sex and age atretirement, would increase the annuity.The rate of additional bonus for futureretirements may be varied at any time.

1.3.4 Smoothing of Maturity andDeath Benefits

1.3.4.1 The smoothing approach differsbetween accumulating and conventionalwith-profits policies as follows:

For accumulating with-profits policies(i.e. unitised and cash accumulation with-profits policies):

> Pay-out values are smoothed primarilyby looking at the change in the pay-out value on sample policies from oneyear to the next. However, we mayalso consider the change in pay-outvalues on sample policies of the sameduration from one year to the next.

For conventional with-profits policies:

> Pay-out values are smoothed primarilyby looking, for sample policies, at thechange from one year to the next inthe maturity values of correspondingpolicies of the same duration.However, we may also consider thechange in the pay-out value on samplepolicies from one year to the next and,for deferred annuity policies, in thepension payable at vesting.

1.3.4.2 In normal circumstances we donot expect most pay-out values onpolicies of the same duration to changeby more than 10% up or down from oneyear to the next, although some largerchanges may occur to balance pay-outvalues between different policies.Greater flexibility may be required incertain circumstances, for examplefollowing a significant rise or fall inmarket values (either sudden or over aperiod of years), and in such situationsthe PAC Board may decide to vary the


standard bonus smoothing limits toprotect the overall interests ofpolicyholders. Such a situation arose inFebruary 2009 when pay-out values onmost equivalent policies were reduced byamounts greater than 10% (i.e. outside ofthe normal limits).

1.3.5 Target ranges for MaturityBenefits

1.3.5.1 We set a target range for thematurity payments that we shall make onour with-profits policies, expressed as apercentage of asset shares. The targetrange we use is 80% – 120%.

1.3.5.2 We have set this range as itallows us to target stable bonus rates andallows a reasonable degree of flexibilityto smooth returns in periods of marketvolatility. It also provides greater certaintyto policyholders and minimises the risk ofcustomers not receiving their fair share ofthe fund return or of receiving paymentswhich are more than the fund can affordto the detriment of the remainingpolicyholders.

1.3.5.3 For all policies where it isreasonable to determine payouts basedon asset shares we manage our businesswith the aim of ensuring that maturitypayments for at least 90% of with-profitspolicies fall within the target range. In certain circumstances it is notreasonable to determine payouts basedon asset shares (e.g. for IB policies, see paragraph 1.3.1.3).

1.3.5.4 In setting target ranges, we usesample policies for all product types. Thisapproach is consistent with the approachoutlined in 1.3.1. We do not expect therange of maturity benefits relative toasset shares to be materially differentfrom the range that would apply if allpolicies were considered.

1.3.5.5 Bonus declarations are normallymade with the intention that at least 90%of maturity payments are expected to fallwithin the target range in the periodcovered by the declaration. However,any substantial movement in the marketvalue of the assets of the relevant with-profits sub-fund may take a significantproportion of pay-out values outside thetarget ranges. This may lead to a mid-year bonus declaration to bring morepay-out values within the target range.

1.3.6 Surrender Values and MarketValue Reductions (MVRs)

The approach to surrender values differsbetween accumulating and conventionalwith-profits policies.

1.3.6.1 Accumulating with-profitspolicies

> Surrender values are generally thepay-out values described in paragraph1.3.4, less any discontinuance charge(also known as an early cash-in charge)that may be applied in accordancewith the policy provisions. However,we may then apply an MVR to ensurethat neither the security of the sub-fund nor the return to continuingpolicyholders is affected by payingsurrender values significantly in excessof the value of the underlying assets.

> An MVR may apply if:

− a policy is surrendered (partly or wholly),

− benefits are taken from a pensionpolicy either before or after theselected retirement date,

− an investment is switched out of a with-profits investment fund into another fund (including theconversion of a with-profitsannuity (issued by PAC) to a non-profit annuity), or

− regular withdrawals are taken.

> The amount of any MVR on a policywill vary as the value of the sub-fund’s assets changes.

> It is not our practice to apply MVRswhich reduce surrender values belowan amount fairly reflecting the valueof the assets underlying the policy.

> On some policies, the impact of anyMVR is reduced as policies approachmaturity with the aim of ensuring thatsurrender values progress smoothlyinto maturity values. Typically, this isdone over the last 5 years of thepolicy.

> All accumulating with-profits policiesprovide some specific guarantees atcertain times – for example on death,terminal illness or the pre-selectedretirement date. At these times noMVR can apply.

> Partial withdrawals are normallysubject to an MVR; however, regularautomatic withdrawals may have beenset up with a guarantee that no MVRwill apply. On a partial withdrawal, theasset share of the remaining part ofthe policy is not adjusted to reflect anydifference between the surrendervalue and the asset share of the partsurrendered (i.e. the asset share isreduced by the proportion that thewithdrawal amount bears to the policyvalue before any MVR deduction).

1.3.6.2 Conventional with-profitspolicies

> Surrender values are derived by wayof a formula, the parameters of whichare set to broadly target asset shares– over the long term, less anydeductions necessary to protect theinterests of existing policyholders.The formula is based on the sum


1.3.7 Asset share approach

1.3.7.1 OverviewAsset shares are calculated as the accumulation of all items of income and outgo thatare relevant to each policy type:

Income comprisescredits for:

Premiums

Investment return (including unrealised gains)

Miscellaneous profits

Outgo comprisescharges for:

Tax, including an allowance for tax on unrealised gains

Guarantees and smoothing

Mortality and morbidity

Shareholders’ profit transfers

Miscellaneous losses

Expenses and commission (net of any tax relief)

assured, regular bonus and finalbonus applicable to the policy. Theparameters in the formula differ byproduct and can be varied at anytime. In setting surrender bases, weaim to ensure surrender valuesprogress smoothly to maturity values.Typically, this is done over the last 5years of the policy.

> The surrender bases are normallyreviewed each year, although thelevel of surrender values is monitoredmore frequently to ensure theyremain reasonable. Any changes tothe surrender bases are designedprimarily to reflect the changes inunderlying asset values.

1.3.6.3 Target ranges for surrenderbenefitsThe target ranges for surrender benefitsare the same as those applicable formaturity benefits, which are set out inparagraph 1.3.5.1. At the time of eachsurrender value review payouts arenormally set such that, when expressed asa proportion of the asset share at theexpected date of claim, payouts for over90% of the sample policies are expected tofall in the range 80%-120% of asset share.

A fall in the market value of the assets ofa with-profits sub-fund would lead toimmediate changes in the application ofMVRs to accumulating with-profitspolicies. This could lead to an increase inthe size of MVRs already being applied,and to an extension to the range ofpolicies to which an MVR is applied.

For policies where a partial encashment of with-profits benefits has been taken (forexample, regular withdrawals, part surrenders, annuity payments or switches), the assetshare will, in addition, be reduced to reflect the benefits that have been encashed.

Variations in asset share calculations for specific policy types are set out in paragraphs1.3.8 for PAC and ex-ELAS policies and 1.4 for SAIF and SAA policies.

Sample asset shares are generally calculated for an average policy size assuming thatthe policies commenced, and cash flows occur, in the middle of each bonus or schemeyear. Final bonus rates are based on asset shares projected to the middle of the bonusor scheme year.

1.3.7.2 Investment Return

The asset shares for all the with-profits policies that are in a particular asset pool arecredited with the investment return (including unrealised capital appreciation ordepreciation) earned on the pool over each year, expressed as a single annual rate.Hence, asset shares are not credited with any part of the investment return earned onthe inherited estate. The range of asset pools is described in paragraphs 2.1 and 2.3.3.

1.3.7.3 TaxFor life assurance business, tax is payable on investment income and realised capitalgains (after allowing for indexation relief) but is partially offset by tax relief on relevantexpenses. Tax is charged to asset shares for life assurance product lines in the same way.

For approved pensions business, investment income and gains are not subject totaxation and likewise expenses are not relieved (except to the extent that they formpart of the shareholders’ profit on that business). Hence, no tax is charged to assetshares for approved pensions business product lines.


PAC is assessed for tax as a singleshareholder-owned entity and the taxapportioned to sub-funds fairly, subject tothe requirements that:

> the amount charged to SAIF is theamount that SAIF would pay if it weretaxed as a mutual life assurancecompany. In effect any differencebetween the tax otherwise fairlyapportionable to SAIF and the amountcharged to SAIF falls to the PACinherited estate, and

> the amounts charged to each of theWPSF and DCPSF are not greater thanthose which would be charged if eachsub-fund individually comprised theentire with-profits fund of a UKproprietary life insurance company.

Any difference between the tax charged toasset shares in each sub-fund and theoverall amount of tax charged to that sub-fund falls into the PAC inherited estate orthe SAIF inherited estate as appropriate.

The tax rates assumed in calculating assetshares are amended when tax rateschange. They are also reviewedperiodically and may be retrospectivelyadjusted to reflect any significantcumulative difference between the tax charged to asset shares and the total tax paid in respect of thecorresponding policies.

1.3.7.4 Guarantees and SmoothingFor new WPSF business, an analysis iscarried out from time to time to determinecharges for smoothing and guarantees thatthe Directors of PAC believe arereasonable and fair for each type ofproduct. The resulting charges arededucted in calculating asset shares andcredited to the PAC inherited estate, whichbears the costs of smoothing andguarantees as they emerge.

On policies other than with-profits annuity,Income Choice Annuity or those investedin the PruFund Range of Funds, the totaldeduction charged to asset shares over thelifetime of each policy is not currently morethan 2% of asset shares, with the deductionbuilding up to this level over the first fewyears of the policy.

For with-profits annuity contracts providedby PAC a deduction is made from theinvestment return credited to asset shareseach year. This deduction is derived so thatin aggregate its value is expected to coverthe costs of guarantees over the lifetime ofthe portfolio of this business.

For Income Choice Annuity a deduction ismade from the investment return creditedto asset shares each year and anadjustment may also be made to the levelof starting income. This adjustment may bepositive or negative. The deduction fromthe investment return and the adjustmentsto starting income levels are derived sothat, in aggregate, their value is expectedto cover the cost of guarantees over thelifetime of the policy.

The deductions made to cover the cost ofsmoothing and guarantees for newbusiness are regularly reviewed and maybe adjusted, for example in line withmarket conditions, changes in assetallocation and/or changes in business mix.The level of these charges can rise or fall asa result of these reviews.

For in-force business, the company keepsthe level of charges under review and mayalter these if necessary to protect thesolvency of the With-Profits Fund.

For investments in the PruFund Range ofFunds, see 1.3.8.5 for further information.

For the business transferred from ELASand allocated to the DCPSF, a deduction ofup to 0.5% p.a. is made from the

investment return credited to asset shares.This charge is transferred from the DCPSFto the WPSF and, in return, the WPSFmeets the cost of guarantees. This chargeis kept under review and may be amendedbut cannot exceed 0.5% p.a.

1.3.7.5 Mortality and MorbidityFor WPSF, SAIF and SAA business, amortality charge is deducted in calculatingasset shares. This charge is calculated byapplying a mortality rate to the excess ofthe benefit on death over the current valueof the policy. Any difference between theaggregate mortality charge and the cost ofdeath claims each year accrues to theappropriate inherited estate. A similarapproach applies for morbidity costs.

For the business transferred from ELAS, tothe extent that actual payments of incomeare less or more than expected in anycalendar year because of heavier or lightermortality than expected, the profit or losswill accrue to the WPSF. Should Prudentialadopt a different mortality basis for thisbusiness, the effect of this change on theasset shares is subject to certain limitswhich are described in Appendix B.

1.3.7.6 Shareholder ProfitFor a WPSF with-profits policy, the amounttransferred to shareholders in respect ofthe bonuses credited to the policy isdeducted in calculating asset shares. Thebasis of determining the amount to betransferred is described in paragraph7.3.1. There is no such charge to the assetshare of a DCPSF, SAIF or SAA policy.

Additional tax is payable as a consequenceof the transfer of shareholder profits out ofthe WPSF. This has always been chargedto the PAC inherited estate and it isexpected that this will continue subject tothe security of the sub-fund remainingsatisfactory when the tax is paid (seeparagraph 5.3.2.1).


1.3.7.7 Miscellaneous Profitsand Losses For WPSF business, miscellaneous profitsand losses are reflected in asset shares as follows:

> Profits and losses from:

> non-profit annuity business, written inthe WPSF and also that transferred tothe WPSF from PAL, written between 1January 2000 and 30 June 2004, withthe exception of Prudential PersonalRetirement Plan (PPRP) vestings, and

> certain other non-profit UK businesswritten in the WPSF

are allocated each year to all UK with-profits product lines (other than thePruFund Range of Funds) as an addition ordeduction in the calculation of asset shares.

> Aggregate profits, or losses, ondiscontinuance of with-profits policies(other than profits or losses fromsmoothing) are calculated each year forcertain product groups and credited tosurviving policies in the calculation ofasset shares for that product group.This aggregate profit or loss is thedifference, in respect of discontinuingpolicies, between the asset shareallowing for the expenses incurred inrunning the business and the assetshare allowing for the charges taken to cover these expenses. Theseexpenses include the actual cost ofshareholder transfers.

> Aggregate profits, or losses, that mayemerge from any other UK businessrisk will be credited each year to assetshares across all UK product lines(other than the PruFund Range ofFunds), unless the Directors havedecided that specific losses should beborne by the PAC inherited estate (seeparagraph 3.3.4).

1.3.7.8 Expenses and Commission As described in paragraphs 1.3.7.6 and3.3.4, certain costs allocated to the WPSFare charged to the PAC inherited estateand not to asset shares.

All other expenses, including commission,allocated to the WPSF are split intoacquisition and administration expenses,and expressed as some or all of a rate per policy, a rate per cent of premium,a rate per cent of sum assured and as a reduction in the investment return. Therelevant combination of these expenserates is normally deducted in calculatingasset shares.

However, the net impact of the charges toasset shares for expenses and for items 1.3.7.5 to 1.3.7.7 above is limited as follows:

> for all new business since 1997, theaggregate projected deductions equalsthe aggregate projected policy-specificcharges used when illustrating benefitsat point of sale, while

> for many pension contracts, the netimpact of these deductions has beenlimited to 1% p.a. since April 2001; thislevel of charge is not guaranteed toapply in future, and

> for certain other personal pension andcorporate pension policies, an annualrate of charge is applied; the currentlevel of charge is not guaranteed toapply in future.

Up to 31 December 2011 the excess ofany costs incurred in excess of theamounts charged to asset shares (alsoreferred to as cost over-runs) was borne bythe PAC inherited estate. However, from 1January 2012 onwards, the PAC Board hasdecided that new business in the WPSFshould be priced such that it is expected tobe financially self supporting over the

lifetime of the business at the point thepricing assumptions are set. Where thebusiness is not expected to be financiallyself-supporting at the point the pricingassumptions are set, shareholders willmake an appropriate contribution to theWPSF. In considering whether newbusiness is self-supporting, it should benoted that:

(i) the test of self-supporting does notinclude the tax liability arising fromshareholder transfers on that business.As described in section 5.3.2.1 of thePPFM, this tax will be charged to thePAC inherited estate subject to thesecurity of the sub-fund remainingsatisfactory when the tax is paid; and

(ii) new business may temporarily not beself-supporting, resulting in cost over-runs which are borne by the PACinherited estate, following a materialchange in the business environmentwhich is outside of the firm’s control.This reflects the fact that businesscannot necessarily be re-pricedimmediately, and that the change inbusiness environment (for example amarket fall) may, in good faith, bebelieved to only be temporary.

1.3.8 Significant variations in practicefor specific types of PAC policy

1.3.8.1 Business originally issued byScottish Amicable Life plc (SAL)In calculating asset shares:

> the only relevant items of income andoutgo are premiums, investmentreturn, charges for tax, guarantees andsmoothing, mortality and morbidity,and the explicit charges for expensesand profit specified on similar unit-linked policies; and


> credit for miscellaneous profit will be given only if the asset sharescalculated using explicit charges with no allowance for miscellaneousprofit are less than the asset sharescalculated using actual expenses withallowance for miscellaneous profit andthe distribution of profit to PAC shareholders.

If the difference between the chargesdeducted and the expenses incurred is less than the actual shareholder transfer,then this deficit accrues to the PACinherited estate.

The final bonus rates for surrenders maydiffer from those for death or maturityclaims to reflect expected future bonus rates.

1.3.8.2 With-Profits Annuity Asset shares are calculated by means of aretrospective accumulation of premiumspaid, allowing for actual investmentreturns (net of charges, including thosetaken to cover the cost of guarantees)and the deduction of unsmoothedannuity payments. Asset shares are alsoadjusted to reflect the respreading ofmortality surplus each year arising fromreleases of asset shares on deaths (theamount which is respread is based on thedifference between the actual andexpected mortality experience for theperiod under review). The unsmoothedannuity represents the annuity that wouldbe paid before smoothing is applied andwithout allowance for any minimumguarantee that might apply.

The regular bonus declared each year hasa permanent effect on the incomereceived. This income will increase if thebonus declared is higher than theanticipated bonus rate selected by the

policyholder or (subject to the minimumincome guarantee) decrease if the bonusdeclared is lower than the anticipated rate.

An additional bonus may be declared eachyear which increases the income receivedfor 12 months only. Additional bonusescan be amended at any time, but anyadditional income that is being paid willnot be reduced before the nextpolicy anniversary.

The regular and additional bonusesdeclared each year affect the income fromthe annuity policy anniversary which fallswithin the next bonus year.

The smoothing approach seeks to ensurethat annuity income does not:

> fall by more than the selectedanticipated bonus rate in a year,

> rise by more than 11% a year, less theselected anticipated bonus rate, or

> fall on the first policy anniversary.

Larger changes may, however, be requiredto balance pay-out values betweendifferent policies. Greater flexibility mayalso be required in certain circumstances,for example following a significant fall inmarket values (either sudden or over aperiod of years). In such situations the PACBoard could decide to vary the bonussmoothing limits to protect the overallinterests of policyholders.

A With-Profits Annuity cannotbe surrendered.

With-Profits Annuities written before 15 May 2000 cannot be converted to non-profit annuities. With-Profits Annuitieswritten on or after 15 May 2000 but before1 October 2001 can be converted to non-profit annuities at certain dates followingthe death of either the first life or the

second life if the policies are joint lifepolicies. With-Profits Annuities written on or after 1 October 2001 can beconverted to non-profit annuities at certaindates. The amount of the non-profitannuity will depend on the then currentalteration basis.

1.3.8.3 Defined Charge ParticipatingSub-Fund (DCPSF) business (non ELAS business)In calculating asset shares, the onlyrelevant items of income and outgo arepremiums, investment return, claimspayments for regular withdrawals and partsurrenders, the charges for guarantees andsmoothing and the explicit charges forexpenses and profit specified by the policy.

The detail of the PruFund Range of Fundsfor International Prudence Bond andPrudential International Investment Bondare covered separately in paragraph1.3.8.5 below.

1.3.8.4 Defined Charge ParticipatingSub-Fund (DCPSF) (business transferredfrom ELAS)The Scheme which transferred the ELASwith-profits annuities to PAC states thatthis business must be managed inaccordance with the Principles of FinancialManagement (PFM) contained in thatScheme. The PFM is included in AppendixB, and this details the management of thisbusiness. This section summarises theimportant aspects.

(i) Investment ReturnsThe investment return that is credited toasset shares will be determined byreference to the investment return which,before deduction of charges andadjustments for any tax liability or credit inaccordance with applicable tax legislation,but net of unrecoverable tax, is the sameas the rate of investment return earned bythe WPSF (net of unrecoverable tax).


(ii) Asset SharesThe asset shares will be calculated bymeans of a retrospective accumulation ofthe “initial asset share” transferred to PACby ELAS, allowing for actual investmentreturns (net of charges, including thosetaken to cover the cost of guarantees).

This amount will be further adjusted bydeducting unsmoothed annuity payments,any uplifts or reductions applied as a resultof the longevity risk mechanism, and therespreading of mortality surplus each yeararising from releases of asset shares ondeaths (the amount which is respread isbased on the difference between theactual and expected mortality experiencefor the period under review). Theunsmoothed annuity is calculated as theannuity that is expected to exhaust theasset share over the remaining lifetime ofthe annuitants.

Under the longevity risk mechanism,mortality profits and losses are fed backinto asset shares to the extent thatexpected mortality across the ex-ELASannuities is different from that expected atthe date of transfer. The amount of anyloss or profit charged/credited to assetshares is limited to the equivalent of 0.5%of asset shares per annum. Any mortalityprofits or losses not charged to assetshares fall into the PAC inherited estate, asdo differences between actual andexpected mortality costs each year.

(iii) BonusesA separate bonus series was set up for thewith-profits annuities transferred fromELAS. No other with-profits businessshares in this bonus series.

An ex-ELAS with-profits annuity has twoelements that are tracked separately, the guaranteed income and the non-

guaranteed income (Total Annuity), and the policyholder receives the larger ofthe two. Each element changes asdescribed below.

Any regular (reversionary) bonus declaredapplies for the year starting on 1 April following the declaration. Any suchbonus would have a permanent effect onthe guaranteed income. The guaranteedincome will increase from the previousyear if the bonus declared is higher thanthe ABR selected by the policyholder, ordecrease if the bonus declared is lowerthan the ABR. The level of regular bonusdeclared is expected to be zero for theforeseeable future. Some policies have aGIR which has been anticipated within theguaranteed income, and the level ofregular bonus declared (if any) could differfor different levels of GIR.

The amount of Total Annuity is adjusted atannuity anniversaries by the ORR and IRRapplicable at that time, less the ABR andless any GIR that applies to that policy.

The ORR generally reflects the earnings onthe sub-fund over the calendar yearending 31 December prior to theannouncement of the ORR each February.It is applied to the Total Annuity at theannuity anniversaries in the 12 monthperiod following 1 April each year. The IRRgenerally reflects the expected earnings,expressed as an annual rate, on the fundsince the end of the last calendar year forwhich an ORR has started to becomeeffective. A proportion of the IRR,depending on the period between the endof the calendar year for the effective ORRand the annuity anniversary, is applied tothe Total Annuity. When the IRR is applied,the proportion of the IRR that was appliedto the Total Annuity at the previous annuityanniversary is removed.

Although the IRR can be changed at anytime through the year to keep it in line withthe return expected on the sub-fund inthat year, it is the IRR that was effective onthe annuity anniversary that is used in thecalculation of the Total Annuity.

The bonuses applied to with-profitspurchased life annuities transferred fromELAS will be the same as those applied topensions annuities.

(iv) SmoothingIn calculating the amount to be transferredto the smoothing account, it is necessaryfirstly to determine the cost of guarantee.The cost of guarantee is calculated asbeing the guaranteed annuity less theunsmoothed annuity (referred to above)and is subject to a minimum of zero.

The smoothing cost is then calculatedas the annuity paid to the policyholderless the guarantee cost and theunsmoothed annuity.

In normal circumstances, the smoothingapproach seeks to ensure that annuityincome does not:

> Fall by more than the combined effectof the selected anticipated bonus rateand any guaranteed investment return,in any year.

> Rise by more than the smoothing cap,less the combined effect of theselected anticipated bonus rate andany guaranteed investment return, inany year. The smoothing cap iscurrently 11% and may be reviewed atany time by the PAC Board subject toapproval by the WPC.

Greater flexibility may be required incertain circumstances, for examplefollowing a significant fall in market values(either sudden or over a period of years).


In such situations the PAC Board coulddecide to vary the bonus smoothing limitsto protect the overall interests ofpolicyholders, subject to review, whereappropriate, by the WPC.

The bonus smoothing account will bemanaged with the ongoing aim that itshould always tend to zero subject to theneed for short-term smoothing. In additionwe will apply smoothing to ensure theobjective of gradual, rather than erratic,changes in income.

If, under the provisions of the Scheme,PAC opts to terminate the scheme, anypositive amount remaining in the bonussmoothing account will be distributedamongst the then remaining annuitypolicies by way of an enhancement to non-guaranteed income in a way consideredfair by the WPC.

(v) Miscellaneous Profits and Losses No adjustments are made for anymiscellaneous profits and losses for this business.

1.3.8.5 PruFund Range of FundsA list of the investment funds thatcomprise the PruFund Range of Funds isgiven in Appendix C.

When new money is invested in thePruFund, it is used to buy units in the fixedrate account corresponding to the selectedinvestment fund. On a quarterly basis thevalue of the holding in the fixed rateaccount is moved into the selectedinvestment fund, although from26 August 2017 new investments inthe Prudential Retirement Account aremoved on a monthly basis.

For all policies invested in the PruFundRange of Funds, with the exception ofPrudential Retirement Account business,

Annual Management Charges (AMCs) areapplied by explicit unit deduction. ThePrudential Retirement Account businessinvests in a different series of PruFundFunds, which use a different pricingapproach, whereby allowance for theAMC is included in the unit price, andother product charges (including for anyoptional guarantees) are taken by explicitunit deduction. Part of the AMC is acharge for smoothing and the fixed rate ofreturn that is paid when premiums arewaiting to be invested. The Directors ofPAC believe these charges are reasonableand fair in relation to the costs ofsmoothing and guarantees that areexpected to be incurred by PruFund fundsover the long term.

Note that each of the Growth, GrowthPension, Cautious, Cautious Pension andGrowth & Income Funds (including thoseavailable under International PrudenceBond and Prudential InternationalInvestment Bond) has an associatedProtected Fund on which an investmentguarantee applies. However, the ProtectedFunds are not available on Prudential ISAor Prudential Retirement Accountbusiness. For those policies which haveinvested in a Protected Fund, an explicitcharge for the investment guarantee ismade by unit deduction, in addition to the AMC.

The Prudential Retirement Accountproduct offers an optional investmentguarantee on the PruFund Growth Pensionand PruFund Cautious Pension funds, thisis offered via a guarantee sub-accountrather than a separate Protected PruFundfund. For policies that have the investmentguarantee a charge is made for theguarantee via explicit unit deductions.

An optional Minimum Income Guarantee(MIG) is available on certain PruFund funds accessed via the Prudential

Retirement Account. The guarantee isavailable on vested funds only, and acharge is made for the guarantee viaexplicit unit deductions.

Any cancellation of units as a result ofswitches, transfers or withdrawals from thePruFund Range of Funds may be subject toa delay of up to 28 days from the date ofreceipt of a request to cancel units. Theunit price on the final day of the delayedperiod will be used as the price of the unitsfor these purposes.

Where policies are invested in one of thePruFund Range of Funds, they participatein profits by means of an increase in theunit price of the selected investment fund.

Expected Growth Rates are annualisedrates which are set quarterly by thePrudential Directors, having regard to the investment returns expected to beearned on the assets of the funds over the long-term.

The unit price will change on a daily basisat the relevant Expected Growth Rate(which is published on each quarter date)unless the unit price moves outsidespecified limits, which are set out below:

> On or between quarter dates (ormonthly switch dates in the case ofPrudential Retirement Accountinvestments made from 26 August2017), the net asset value per unit isaveraged over the previous 5 workingdays to give the average net assetvalue per unit. If the net asset value perunit and the average net asset valueper unit are both 10% (or more)above/below the unit price, the unitprice will be increased/decreased sothat it is 2.5% below/above the netasset value per unit.


> In addition, on a quarter date (ormonthly switch date in the case ofPrudential Retirement Accountinvestments made from 26 August2017), if the net asset value per unit is5% or more above/below the unitprice, the unit price is repeatedlyincreased/decreased by half thedifference between the unit price andthe net asset value per unit until the netasset value per unit is within 5% above/below unit price. The net asset valueper unit is calculated by Prudential inaccordance with the policy provisions.

Whilst in the fixed rate account,investments will grow at the ExpectedGrowth Rate for the selected investmentfund, and while charges will apply asnormal during this period, the investmentwill not be subject to any adjustmentswhen the unit price moves outside thespecified limits.

For each of the PruFund Range of Funds,except those Funds available underInternational Prudence Bond andPrudential International Investment Bond, asmoothing account is maintained withinthe inherited estate of the WPSF that iscredited or debited as appropriate with anydifference between the unit price and thenet asset value per unit when units arecreated or cancelled as a result ofpremiums being received or claims being paid.

Funds from the PruFund Range of Fundsavailable under International PrudenceBond and Prudential InternationalInvestment Bond are written in the DCPSF.For this business a smoothing account ismaintained within the inherited estate ofthe WPSF that is credited or debited asappropriate with any difference betweenthe unit price and the net asset value perunit when units are created or cancelled asa result of premiums being received orclaims being paid.

If aggregate net flows of business into orout of an investment fund exceed limitsspecified within the policy provisions, thecompany may suspend the smoothing ofthe unit price, in which event the unit pricewill be the net asset value per unit. Thecompany may also suspend the smoothingof the unit price if required to protect ourWith-Profits Fund.

For the purposes of suspension ofsmoothing, the PruFund Range of Fundsare split such that smoothing can besuspended on each class of businessindependently of the others. This splitbetween the classes of business is given inAppendix C.

1.3.8.6 Income Choice Annuity(i) IntroductionThe Income Choice Annuity is an annuitywhere the income paid to the policyholderhas two elements that are calculatedseparately for each policy year – theguaranteed income (the Secure Level)and the non-guaranteed income.Thepolicyholder receives the higher ofthe two.

(ii) Non-Guaranteed IncomeAt policy commencement the policyholder can choose a level of startingnon-guaranteed income from within arange that we calculate. Associated withthis choice will be a Required SmoothedReturn. This is the Smoothed Returnrequired each year to maintain the non-guaranteed income selected by the policyholder throughout theirremaining lifetime.

A Smoothed Return is declared each yearand varies by bonus year of issue. It iscalculated using a similar approach to thatused when calculating Final Bonus onother contracts. In particular, theSmoothed Return is calculated to targetpayouts on asset share (as described in

1.3.1). The asset share is calculated usingthe approach set out in 1.3.7 subject to thevariations in (v) below.

The non-guaranteed income is adjusted at annuity anniversaries with the new level of non-guaranteed income calculatedas follows:

Previous non-guaranteed income x (1 + Smoothed Return)/(1 + Required Smoothed Return).

Hence the non-guaranteed income willincrease if the Smoothed Return is higherthan the Required Smoothed Return and will decrease if the Smoothed Return is lower than the RequiredSmoothed Return.

The Smoothed Return can be amended at any time, but will not impact what is paid to the policyholder until the nextpolicy anniversary.

(iii) Guaranteed Income (Secure Level)A starting Secure Level is set at policy commencement.

The Secure Level can never go down. Forpolicies issued before 7 November 2011,and for any policies issued on or after 7November 2011 which are based onquotes issued prior to that date andaccepted within the guarantee period, theSecure Level increases at each policyanniversary by 50% of any positivedifference between the new non-guaranteed income and the actual incomepayable in the year leading up to thecurrent policy anniversary. For all otherpolicies the Secure Level is fixed at outsetfor the lifetime of the policy.

(iv) Option to change thenon-guaranteed incomeOn every policy anniversary thepolicyholder will be given the opportunityto change the level of their non-guaranteed income by selecting from a


range that we calculate at the time. Thelower level of the range will never be lessthan the Secure Level. If the policyholderdecides to select a new level then theirRequired Smoothed Return will changeaccordingly. There is no change to theirSecure Level.

We can change the range of availableRequired Smooth Returns at any time, forexample, in April 2016 the maximumavailable Required Smoothed Return wasreduced to 4.5% in response toexpectations of lower future interest rates.Policyholders may choose a new level ofnon-guaranteed income within the rangewe set. We can withdraw this option, orpostpone the policyholder’s request tochange income, if this is considerednecessary to protect the sub-fund.

(v) Asset SharesAsset shares are calculated by means of aretrospective accumulation of premiumspaid, allowing for actual investment returns(net of charges, including those taken tocover the cost of guarantees) and thededuction of unsmoothed annuitypayments. Asset shares are also adjustedto reflect the respreading of mortalitysurplus each year arising from releases ofasset shares on deaths (the amount whichis respread is based on the differencebetween the actual and expected mortalityexperience for the period under review).The unsmoothed annuity represents theannuity that would be paid beforesmoothing is applied and withoutallowance for any minimum guarantee thatmight apply (see (vi)).

(vi) SmoothingIn normal investment conditions, thesmoothing approach seeks to ensure thatpolicyholders’ non-guaranteed incomedoes not

> fall by more than the RequiredSmoothed Return,

> rise by more than 12% a year, or

> fall on the first policy anniversary.

Larger changes may, however, be requiredto balance pay-out values betweendifferent policies. Greater flexibility mayalso be required in certain circumstances,for example following a significant fall inmarket values (either sudden or over aperiod of years). In such situations the PACBoard could decide to vary the bonussmoothing limits to protect the overallinterests of policyholders and hence theSmoothed Return could be negative.

(vii) Conversion to a non-profit annuityAn Income Choice Annuity cannot besurrendered but it can be converted to anon-profit annuity at certain dates. Theterms offered on conversion will dependon the alteration basis in-force at the time.

The policyholder’s fund available forconversion to a non-profit annuity is thecurrent value of expected future paymentsunder the Income Choice Annuity.

The value of this fund may be reduced toensure that neither the security of theWPSF nor the return to continuingpolicyholders is affected by using aconversion value significantly in excessof the underlying assets. Any reductionwill vary as the value of the WPSF’sassets changes.

1.3.9 New bonus series

Any new type of product generallyconstitutes a new bonus series (i.e. it hasrates of regular and final bonus that areappropriate to that type of product).

We would introduce a new bonus seriesfor an existing type of product if we didnot expect to be able to fairlyaccommodate the difference between theexperience of the old and new business byusing the flexibility in our bonus structure.This might arise from a difference in theinvestment mix, a change in theinvestment environment, or a difference inthe exposure to business or insurance risk.The introduction of a new series wouldlimit the impact of the experience of thebusiness written under either bonus serieson the bonus rates of the other series.

1.4 Variations for Scottish AmicableInsurance Fund (SAIF) and Scottish Amicable Account (SAA)with-profits policies1.4.1 The Scheme which transferred thebusiness of SALAS to PAC included thePrinciples of Financial Management (PFM)by which the Scottish Amicable Fundsmust be managed. The bonus policyagreed by the Scottish Amicable Board isconsistent with the PFM.

In general, SAIF and SAA policies aremanaged in the same way as WPSFpolicies. The following paragraphs set outthe significant differences in Practices.

1.4.2 In targeting pay-out values, assetshares for SAIF and SAA policies areincreased by a claims enhancement factor.The factor is applied to asset shares withthe aim of distributing the SAIF inheritedestate, but not the assets in the SACF, overthe remaining lifetime of the with-profitspolicies in SAIF and SAA.


The claims enhancement factor isreassessed at least every three years and isexpressed as a percentage increase to theasset shares. It is a uniform percentage forbusiness that has been in force for 10 yearsor more, with a proportionately lowerpercentage at shorter durations.

1.4.3 The approach to smoothing formaturity and death benefits for SAIF andSAA policies is similar to that for WPSFpolicies, except that in normalcircumstances pay-out values on policies ofthe same duration may go up or down by amaximum of 15% for single premiumpolicies and up or down by 7% about thelong-term trend for annual premiumpolicies. Greater flexibility may be requiredin certain circumstances, for examplefollowing a significant rise or fall in marketvalues (either sudden or over a period ofyears), and in such situations the ScottishAmicable Board may decide to vary thestandard bonus smoothing limits to protectthe overall interests of policyholders. Sucha situation arose in February 2009 whenpay-out values on most equivalent policieswere reduced by amounts greater than thenormal limits. In addition, all pay-out valuesfor SAIF and SAA policies must move atleast one-third of the way towards assetshare when moving downwards and atleast one-quarter of the way towards theasset share when moving upwards.

1.4.4 The calculation of asset shares forSAIF and SAA with-profits business differsfrom that for WPSF with-profits business inthe following ways.

> Asset shares are calculated for samplepolicies using Scottish Amicable’sapproach at 31 December 1996, andare accumulated by reference to thesubsequent investment performance,expense and taxation experience of SAIF.

> The SACF support charge, equivalentto 1% p.a. of the mean value of SACF,is deducted from asset shares.

> Prior to 2003 the cost of meetingannuity rate guarantees was charged toasset shares in the year in which itarose. The Scottish Amicable Boarddecided that this might introducesignificant unfairness betweenpolicyholders if the cost of guaranteeswere to change significantly in future.From 2003, guaranteed annuity ratecosts have been met as follows:

− from 2003 until the end of 2015, anannual deduction of 0.25% waslevied on asset shares,

− from 2016 until the end of 2017, anannual deduction of 1.00% waslevied on asset shares,

− from 2018, an annual deduction of1.25% is levied on asset shares, and

− any additional costs are met fromthe SAIF inherited estate andreflected in the claimsenhancement factor for all SAIF andSAA with-profits policies.

> The accumulation of profits and lossesfrom smoothing and other guaranteesare allocated to a bonus smoothingaccount. The size of the bonussmoothing account is regulated by ayearly percentage deduction from, oraddition to, asset shares which iscredited or debited to the bonussmoothing account. The smoothingcharge/credit, which is subject to amaximum charge of 0.4% p.a., isreassessed at least every three yearswith the intention of eliminating anydeficit or surplus on the smoothingaccount over the remaining life of the policies.

> There is no shareholder profit transferassociated with bonuses declared onSAIF and SAA with-profits policies.

> The accumulation of asset sharesincludes an allocation of 0.25% p.a. inrespect of miscellaneous surplus fromnon-profit and unit-linked business.The extent to which the actualmiscellaneous surplus differs from0.25% p.a. is reflected in the claimsenhancement factor.

> The level of expenses charged to SAIFuntil the end of 2007 reflected thefixed fees per policy agreed under thetariff agreement set out in the SALASScheme. Thereafter the chargesreverted to cost, on a basis equivalentto that being charged for WPSFbusiness, subject to the resulting costsfor SAIF policies being no greater thanthose applicable to correspondingpolicies sold by PAC.

> Asset shares for unitised with-profitslife business and all conventional with-profits business reflect the actual levelof expenses incurred by the sub-fund.In accordance with the SALASScheme, asset shares for unitised with-profits pensions business reflect thespecific policy charges on similar unit-linked policies rather than the actuallevel of expenses incurred.


Section 2 – Investment strategy 2.1 Introduction

In this section we describe the significant aspects of our investment strategy, includingthe use of asset pools, which may consist either of physically separate assets or ofnotionally separate assets (also known as “hypothecated” asset pools), consisting of adifferent mix of the classes of assets held in a sub-fund.

Recent and historical information on the asset mix of the with-profits sub-funds isavailable from our website www.pru.co.uk.

The practices set out in paragraph 2.3.1 to 2.3.7 below cover the vast majority of with-profits policies. There are some differences in approach for the Risk ManagedPruFunds which are summarised in paragraph 2.3.8.

2.2 Principles2.2.1 The PAC Board is responsible for setting the investment strategy of thecompany, and manages this strategy as part of the management of the overall risklevel of the company and the With-Profits Fund. It determines investment policiesfor each asset pool that are compatible with the overall strategy and withmaintenance of the ongoing solvency of the With-Profits Fund. The overall riskmanagement procedure is described in section F of the Introduction to the PPFM.

2.2.2 The company’s investment strategy is to seek to secure the highest total return(allowing for the effect of taxation and investment expenses) whilst:

> maintaining an acceptable overall risk level (having regard to the currency,nature and outstanding duration of the liabilities) for the With-Profits Fund,

> maintaining an appropriate and broad mix of suitable investments, and

> protecting appropriately the relative interests of all groups of policyholders.

2.2.3 The company’s investment strategy permits the use of any investmentinstrument, including derivatives, provided the type has been approved by theBoard, as recorded in the Investment Management Agreements between thecompany and its investment managers applicable from time to time.

2.2.4 The company seeks to include all with-profits policies in a common asset poolwherever it is appropriate for them to share a common investment policy. For themajority of products a single common asset pool is appropriate but the Board maydecide that certain products require a separate pool, for example:

> to generate a different asset mix,

> to support a specific product feature,

> to support a product expressed in a different currency, or

> where required by legislation.

2.2.5 No investment strategy relies on assets outside of the asset pool unless theirutilisation has been formally agreed by the Board.

2.2.6 All assets of the WPSF, the Scottish Amicable Insurance Fund (SAIF) and theDefined Charge Participating Sub-Fund (DCPSF), other than any investmentsidentified in paragraph 2.3.6, would normally be available to be traded.

2.3 Practices

2.3.1 The company’s investment practicesare reviewed at least annually by the PACBoard and, for the Scottish AmicableFunds, the Scottish Amicable Board.

The company’s investment practices aremainly set out in a number of InvestmentManagement Agreements, InvestmentServices Management Agreements andInvestment Policy Documents. Theseagreements and documents include:

> a list of approved types of investment(including types of derivatives),

> benchmark asset mixes for each asset pool,

> permitted variations (typically 5% ofthe asset pool) in asset mix as a resultof tactical asset allocation decisions(i.e. if it is considered that investmentreturns over the shorter term arelikely to differ significantly from theexpected long-term returns),

> limitations on credit risk, and

> limitations on counterparty exposures.

The limits are set in accordance with thesub-fund’s risk appetite as agreed by therelevant Board. The risk appetite isdetermined on the assumption that thewith-profits sub-funds are managed on astand-alone basis, and do not rely onshareholder resources with the exceptionof the specific circumstances described inparagraph 5.3.2.2.

If the WPSF was operating materiallyoutside of its risk appetite, the PAC Boardwould expect to take a range ofmanagement actions to address this.Increasing the proportion of fixed intereststocks and cash would typically be one of the actions that would be taken.


− certain with-profits productswhich have a more cautiousinvestment policy than the mainWPSF asset policy (e.g. thePruFund Cautious Funds from thePruFund Range of Funds),

− certain with-profits retirementannuity contracts expected toreach their vesting date in thenear- to medium-term, where theguaranteed benefits significantlyexceed asset shares and thelikelihood of any final bonusbecoming payable is regarded as remote*,

− SACF, which has an asset mix asclose as possible to that of the SAIF,

− non-profit non-annuity liabilitieswithin the WPSF, which arebacked by a combination ofgovernment and corporate bondsof approximately the same overallduration as the liabilities,

− non-profit annuity liabilities withinthe WPSF, backed mainly bygovernment and corporate bondswhose cash flows match theannuity liability cash flows as they emerge,

− assets backing the cost ofguarantees and other liabilities onwith-profits products, and

− assets backing the PAC inheritedestate.

* The asset shares for this businesscontinue to be credited with thereturn earned on the main WPSF assetshare pool, but, for risk managementpurposes, the assets backing thepolicies are held in a separate assetpool to allow investment in assets thatwill closely match the expectedliability cashflows.

> For SAIF policies, most assets are heldwithin the main SAIF asset pool. Thebenchmark asset mix for SAIF’s mainpool differs from that of the WPSF’smain pool to reflect the relativestrength of the two sub-funds. Aseparate asset pool is operated fornon-profit liabilities, which are backedby a combination of government andcorporate bonds of approximately thesame overall duration as the liabilities.Separate asset pools are also held forassets backing guaranteed annuityrates and the SAIF inherited estate.

> For the non ELAS business in theDCPSF, there are two asset poolsrelating to liabilities denominated inthe Euro and the US Dollar. Liabilitiesdenominated in Sterling in the DCPSFare backed by liabilities in the mainasset pool of the WPSF.

Any with-profits policyholder whosepolicy is not credited with the returns onthe main WPSF asset pool has beeninformed of the asset pool backing thepolicy, either as part of the sales processor on the demutualisation of SALAS.

Some asset pools held within the WPSF &DCPSF are what are known as"hypothecated". This means that ratherthan actually holding separate assets inrespect of this pool, the assets are still partof the main WPSF/DCPSF asset pool. Thereason why we may use hypothecatedasset pools is that where an asset pool isrelatively small, the difficulties in obtaininga suitably diversified portfolio of actualassets, and the proportionately high costsof administering a separate pool, meanthat it is beneficial to hypothecate theseassets as part of the main WPSF/DCPSFpool rather than hold them separately.However, investment returns for a

An increase up to a combined proportionof 100% of each sub-fund’s assets may bemade to protect the with-profits sub-funds in extreme investment conditions.

Derivatives are used for the purposes ofEfficient Portfolio Management orreduction in investment risk. The mainuse is of:

> exchange traded futures toimplement changes in asset mix,including tactical deviations from thestrategic asset mix,

> options and futures to help match theliabilities arising from guarantee costs,and

> currency forwards to reduce theexchange rate exposure arising fromholding overseas assets.

Investment in any appropriate new ornovel investment instruments, or in anynew country, which is proposed by theinvestment managers, requires Boardapproval prior to implementation.

2.3.2 Formal reviews of all aspects of the investment policy occur at least oncea year.

2.3.3 A separate asset pool will beestablished when there is a legalrequirement or when the companyidentifies policies for which achievementof its overall acceptable risk level requiresa significantly different asset mix.

Separate asset pools are usuallymaintained for each sub-fund. Withineach sub-fund separate asset pools areheld as appropriate to the differentnature of the liabilities (e.g. with-profits,non-profit, unit-linked) and, usually, forliabilities in each different currency.

> For most WPSF policies assets areheld within the main WPSF assetpool; however separate asset poolsare operated for:


hypothecated asset pool are calculatedbased on the asset mix that would apply ifthese assets were actually a separate pool.

Currently, the following funds havehypothecated asset pools:

> Prudence Bond Optimum Bonus Fund

> PruFund Growth & Income Fund

> PruFund 0-30 Fund and PruFund 0-30Pension/ISA Fund*

> PruFund 10-40 Fund and PruFund 10-40 Pension/ISA Fund*



> PruFund Cautious (Sterling) Fund

> PruFund Cautious (Euro) Fund

> PruFund Cautious (US Dollar) Fund

> AVC Deposit Fund

> The Prudential Personal PensionDeposit Fund

* There is a single hypothecated asset pool covering both the “Fund”and “Fund and Pension/ISA Fund”options for each of these categories(but separate pools for each of the 0-30, 10-40, etc categories).

2.3.4 A stochastic asset/liability model isused to identify the range of asset mixesfor each with-profits asset pool thatwould be consistent with the riskappetite of the with-profits sub-fund (seesection F of the Introduction to thePPFM) which has been set by the PACBoard and, where appropriate, by the

Scottish Amicable Board. The companyselects from that range an appropriatestrategic asset mix for the pool,consisting of a diversified portfolio ofassets which is intended to maximise theexpected long-run investment return,subject to the risk level and liquidityneeds of the asset pool. The modelallows for all significant types ofinvestment risk, including mis-matchingrisk, market risk and credit risk.

2.3.5 The investment policy for with-profits business is to invest in a highlydiversified portfolio of UK and overseasassets. This policy aims to avoid largelosses connected with default orbankruptcy of an individual company andalso generates country diversification.The assets may include any availableassets which enhance the risk/returnbalance; they will consist mainly ofexchange-traded equity and bondinvestments, but may also include lessliquid investments such as directproperty or private equity and debt. Themix of assets held also takes account ofthe need to maintain adequate liquiditywithin the sub-funds. Liquidity ismonitored on an ongoing basis to ensurethe cash-flow requirements of the fundsare met. The investments will not containshares in Prudential plc, but may containshares in subsidiary companies.

2.3.6 There are no assets of the WPSF,SAIF or the DCPSF which would notnormally be traded. However, the level oftrading in respect of the assets backing thenon-profit annuity liabilities would beexpected to be lower than for otherbusiness, in line with the broad intentionto hold these assets to maturity in order tomatch the liability cash flows.

2.3.7 In setting the investment policiesfor the with-profits asset pools, thedirectors do not rely on assets heldoutside the pool except that:

> the investment policy for the WPSFwith-profits pools have regard to theavailability of shareholder resourcesas described in paragraph 5.3.2.2.

> the DCPSF investment policy relieson capital support from anappropriate proportion of the PACinherited estate, and

> the investment policies for SAIF relyon the solvency support provided bySACF to pursue an investment policyappropriate to an open sub-fund (i.e.higher real assets (i.e. equity andproperty) than would otherwise beappropriate for a closed sub-fund).

2.3.8 There are significant variations inpractice for Risk Managed PruFunds.

The asset mix for these investment fundsis determined solely with the aim ofmaximising the returns for a given risk profile.

The numbers contained in the investmentfund names stipulate the permitted rangefor the proportion of the fund’s assetsthat must be invested in equities (e.g. thePruFund 20 – 55 Fund must invest aminimum of 20% of its assets in equitiesand a maximum of 55%).


Section 3 – Business Risks

3.1 IntroductionThe With-Profits Fund is exposed tobusiness risk, which is defined as all risks(and rewards) of the long-term businessother than those connected to investmentreturns (which are addressed in section2). The business risk to which the With-Profits Fund is exposed includes businessrisk arising from PAC’s operations in theUK and from its overseas branches inPoland, France and Malta.

In this section we describe how wemanage and control such business risks,both to protect the security of the With-Profits Fund and to limit any adverseimpact on with-profits policies.

Business risks may arise from a range offactors, including changes in theeconomic and/or regulatoryenvironment, demographic changes,product design features (e.g.guarantees), selling and marketingpractices and, in relation to PAC’soverseas branches, currency andgeopolitical risks. For PAC's Polishbranch, business risks include thoseassociated with setting up a newoperation. There can be no certainty thatall potential risks have been identified.The extent to which with-profits policiesare exposed to these risks will inevitablychange over time.

3.2 Principles

3.2.1 The PAC Board is responsible for the control of business risks within themanagement of the overall risk level of the company and for the maintenance ofthe ongoing solvency of the With-Profits Fund. The overall risk managementprocedure is described in section F of the Introduction to the PPFM.

3.2.2 The Board seeks to ensure that:

> all material or significant risks are identified,

> an appropriate charge is made for all significant risks, and

> the sub-fund bearing a particular business risk receives such charges and anyprofits or losses arising from that business risk.

3.2.3 For products which are exposed to business risks, allowance will be made forall relevant profits and losses arising from business risks when determining pay-outvalues unless the Directors have decided that specific losses will be borne by theinherited estate.

3.3 Practices

3.3.1With-profits policyholders are not exposed to risks arising from generalinsurance business, which is written outside the With-Profits Fund.

3.3.2With-profits policies normally share in the profits or losses from business risksarising within the With-Profits Fund through the allowance for miscellaneous surplus orthrough the allowance for expenses included in the calculation of asset shares. However,under the terms of their policy conditions some with-profits policies, in particular DCPSFpolicies and policies invested in the PruFund Range of Funds, are not exposed to certainspecified risks. Business written in PAC’s Polish branch will not share in miscellaneousprofits or losses arising within the With-Profits Fund in respect of non-Polish businessand the Polish Branch is not itself expected to generate miscellaneous profits or losses.

For with-profits annuities transferred from ELAS, the Scheme of transfer requires thatthese policies are not exposed to, and will not incur any adjustments for, profits orlosses arising from, PAC’s other policies, experience or business activities. However,these policies will be exposed in extreme circumstances if PAC were unable to meet orreserve for its guaranteed liabilities.

3.3.3 Profits and losses on business risks are dealt with as follows:

> those in respect of the WPSF will accrue to WPSF accumulating and conventionalwith-profits policyholders as part of the miscellaneous profits or losses credited totheir asset shares (see paragraph 1.3.7.7), except to the extent that the Board maydecide that specific losses should accrue to the PAC inherited estate;

> those in respect of the SAIF will accrue to SAIF and SAA with-profits policyholders;therefore they are very unlikely to have an impact on policyholders in the othersub-funds.


Unless they are allocated to the PACinherited estate, profits and losses onbusiness risks will generally be allocatedto UK or Polish with-profits policyholdersin accordance with where the relevantrisk arises.

Profits and losses from business risks arenot expected to be large because of thecompany’s approach to managing risk,with the possible exception of theexposure to non-profit annuity businessin the WPSF (see paragraph 3.3.4), andguaranteed annuity rates and guaranteedminimum rates of return in SAIF (seeparagraph 3.3.5).

3.3.4 For with-profits business, otherthan that in SAIF and SAA, specificaspects of business risk are managed as follows:

> WPSF accumulating and conventionalwith-profits policies are exposed tothe level of expenses incurred, andsuch risks may be increased by poorpersistency. The level of expenses iscontrolled as part of the budgetaryprocess. Expenses are charged toasset shares, except as described inparagraphs 5.3.2.1 and 5.3.2.2.

> Smoothing profits and losses arisingfrom surrenders are controlled bymanaging the MVR policy andsurrender bases of accumulating andconventional with-profits policiesrespectively. Any differencesbetween the surrender value paid andthe underlying asset share accrue:

− for WPSF business other thanbusiness in the PruFund Range ofFunds, to the PAC inheritedestate, and

− for DCPSF business and businesswithin the PruFund Range ofFunds (see paragraph C2.3 of the

introduction to the PPFM andparagraph 1.3.8.5 of the PPFM),to the relevant bonus smoothingaccount held within the PACinherited estate.

> Mortality risks for WPSF with-profitsbusiness are managed through thenew business underwriting processand through regular investigations ofmortality trends. Profits and lossesarising from any difference betweenthe amount charged to asset shares formortality risks and the actual mortalitycost incurred for with-profits businessaccrue to the PAC inherited estate.

> Any charges for, or costs of,guarantees for WPSF and DCPSFbusiness transferred from ELASaccrue to the PAC inherited estate.WPSF policies currently have:

− a minimal exposure to guaranteedannuity rates, and

− a modest exposure to guaranteedminimum bonus rates on somegroup cash accumulation businessat various rates:

− 4.75% p.a. on premiums paidin scheme years ending before 15 March 1997,

− 2.5% p.a. on premiums paid inscheme years ending between 15 March 1997 and 30December 2003 (inclusive),and

− 0.01% p.a. on premiums paidin scheme years ending after30 December 2003.

The charges for, or costs of,guarantees for other business writtenin the DCPSF accrue to the relevantbonus smoothing account.

> WPSF with-profits policies written inthe UK, with the exception of policiesinvested in the PruFund Range ofFunds and policies transferred fromSAL, are exposed to all profits orlosses from UK non-profit businesswithin the WPSF (mainly immediateannuities and term assurance, but alsosome whole life, endowmentassurance and deferred annuitybusiness). The main risks from non-profit annuity business are:

− a higher than anticipated increasein life expectancy for annuitants,or

− a higher than anticipated defaultrate on the associated assets(mainly bonds), or

− a widening of credit spreads onthe associated assets

Profits and losses from such risks arereflected in asset shares through theadjustment for miscellaneous surplus, as described in paragraph 1.3.7.7.

> WPSF policies other than policiesinvested in the PruFund Range ofFunds are exposed to operational risks,including product mis-selling or theissue of misleading literature; anyconsequential customer compensationin respect of events which occurred onor before 31 July 2009 would normallybe paid from the WPSF as an expense.However, as described in paragraph5.3.2.2, the PAC Board decided that allexpenses and compensation for themis-selling of PAC with-profits pensionpolicies should be charged to the PAC inherited estate. Customercompensation in respect of eventswhich occurred after 31 July 2009 ischarged to the PAC NPSF.


> PAC and Prudential plc have enteredinto a legally enforceable capitalsupport arrangement (CSA) underwhich Prudential plc has an obligationto provide PAC with capital support,up to an agreed maximum aggregatelevel, in the event of PAC’s solvencyfalling below specified levels. Thecapital support provided to PAC underthe CSA will include any capitalsupport that might be required as aresult of the PAC Pension mis-sellingcost assurance in relation to with-profits business (see Section 5.3.2.2).The capital support under the CSA isavailable until 31 December 2028unless PAC ceases to be a subsidiaryof Prudential plc. In this latter eventthe CSA would terminate andPrudential plc would be obliged to useits best endeavours to securereplacement capital supportarrangements with the group acquiringcontrol of PAC or negotiate in goodfaith alternative arrangements withPAC, depending on the circumstances.

3.3.5 SAIF and SAA with-profits policiesare exposed to corresponding businessrisks on all business in SAIF, and aretreated in a similar way. These policieshave exposure to:

> a significant volume of guaranteedannuity rates, although derivativeshave been purchased to reduce theimpact of any substantial reduction infixed interest yields on the cost,

> a guarantee on certain SAIFaccumulating with-profits pensionbusiness that the minimum rate ofregular bonus will be 4% p.a. on allunits purchased,

> a guarantee on certain SAIF accumulating with-profits pension business that theminimum rate of regular bonus will be 4% p.a. on all units purchased before1 January 2006 and 0.1% p.a. on all units purchased subsequently, and

> a guarantee on certain SAIF accumulating with-profits pension business that theminimum rate of regular bonus will be 4% p.a. on all units purchased before1 January 2006 only.

The costs of guarantees are reflected in asset shares and the claims enhancementfactor, as described in paragraph 1.4.4.

Mis-selling costs in respect of with-profits business sold by SALAS are charged to theSAIF inherited estate and therefore affect pay-outs to SAIF and SAA policyholders.

3.3.6 The risk that results from holding a high proportion of real assets (e.g. equities andproperty) to back smoothed liabilities which incorporate guarantees is managed bykeeping the annual bonus rates to a prudent proportion of the long-term expectedinvestment return (see paragraph 1.3.2.1), and by restricting the sub-funds’ holdings ofreal assets to suitably prudent levels. The cost of such guarantees and smoothing falls tothe PAC and SAIF inherited estate as appropriate (see paragraphs 1.3.7.4 and 1.4.4).

Section 4 – Charges and Expenses 4.1 Introduction

In this section we describe the way in which we allocate expenses and apply chargesto our with-profits business.

4.2 Principles

4.2.1 The overall aim of the expense charging and allocation methodology is toseek to ensure that all expense allocations are fair between policyholders andshareholders, between different sub-funds and between different groups ofpolicyholders.

4.2.2 The principle underlying the company’s expense allocation methods is thatall expenses should be allocated on a consistent basis according to the nature ofthe activity or where the resulting benefit is expected to arise.

4.2.3 Any significant change to our bases and methods of expense allocation andapportionment, or of exercising discretion to apply expenses to particularcategories of business, would be made only if consistent with the above Principles.

4.3 Practices

4.3.1 Total PAC costs are allocated to sub-funds and product groups using methodsthat ensure that each sub-fund and product group receives all of its direct expensesand an appropriate share of all other expenses, including overhead expenses. Anysignificant change to our expense allocation methods would be approved by the ChiefActuary, the With-Profits Actuary and the Chief Financial Officer Insurance.

4.3.2 Paragraphs 1.3.7.8, 1.3.8, 1.4.4, 5.3.2.1 and 5.3.2.2 set out how (if at all)charges for expenses affect asset shares and thus affect the benefits payable on with-profits policies.


4.3.3 All but a small volume of servicesare provided under formal intra-group orcontractual third party outsourcingarrangements. External arrangements areprovided at market prices. Intra-grouparrangements are provided at cost, orsubject to a profit margin or target profitlevel that is appropriate for the risks takenby, and the capital requirements of, theservice provider. Fees for investmentmanagement services are subject to aprofit margin.

4.3.4 All outsourcing arrangements,whether intra-group or with third parties,are reviewed regularly to confirm thatthey remain appropriate and areoperating in accordance with the relevantagreement between PAC and the serviceprovider. Fees are re-negotiated whenappropriate. The two most significantintra-group arrangements (for investmentmanagement and policy administration)can be terminated at 12 and 6 monthsnotice respectively.

4.3.5 The Chief Actuary and the With-Profits Actuary, with regard to advicefrom the WPC, review each year thefairness to each category of with-profitspolicy of the expense allocation andassociated practices, including intra-group and external servicing andreinsurance agreements. This review alsoconsiders the fairness to with-profitspolicyholders of any intra-group assettransfers (e.g. of infrastructure) and theexercise of discretion to apply expensesto particular categories of policy.

Section 5 – Management of theInherited Estate5.1 Introduction

5.1.1 This section describes the inheritedestates in the Prudential With-Profits Fund,and describes how they are managed andthe uses to which they may be put.

5.1.2 An inherited estate is the amountof money in a with-profits fund in excessof the amounts that a company expectsto pay out to meet its obligations toexisting policyholders. These latteramounts are equal to the with-profitspolicyholders’ accumulated asset shares,plus any additional payments that may be required by way of smoothing or tomeet guarantees.

There are two inherited estates inPrudential’s With-Profits Fund, the PACinherited estate in the WPSF and theSAIF inherited estate in SAIF.

5.1.3 The PAC inherited estaterepresents the major part of the workingcapital of Prudential’s With-Profits Fund.It is available to support both current andfuture new business in PAC’s with-profitssub-funds, both in the UK and overseas,and is used to provide solvency support,to allow investment freedom forpolicyholders’ asset shares, and toprovide the smoothing and guaranteesassociated with with-profits business.

5.1.4 The PAC inherited estate has arisenover many years from a number ofsources. PAC believes that no group ofin-force policyholders has made anycontribution to the inherited estate.

5.1.5 The PAC inherited estate, like thewhole of the with-profits sub-funds,belongs to the company, and theDirectors decide how it is used to

support the with-profits business. Whilst the WPSF remains open and theinherited estate remains fully utilised insupporting current and expected futurenew business, PAC does not considerthat policyholders have any expectationof a distribution of the inherited estate,other than through the normal process of smoothing and meeting guarantees in adverse investment conditions.Accordingly, PAC is not constrained in its use of the inherited estate to supportnew business written on the basisdescribed in section 6 of the PPFM by a requirement to take into account theprospect that existing policyholdersmight otherwise have of receiving adistribution, or a greater distribution,from the inherited estate. In setting riskappetite and in its approach to the cost ofguarantees, PAC is similarly not requiredto take into account the prospect ofexisting policyholders receiving adistribution out of the inherited estate.

5.1.6 If, in the opinion of PAC’sDirectors, the WPSF’s inherited estatewas no longer fully utilised in supportingcurrent and expected future newbusiness, then an “excess surplus” would exist in the sub-fund. In suchcircumstances, the Directors wouldcomply with the insurance companyregulations regarding the treatment ofexcess surplus that were in force at thetime the excess surplus arose. Thecurrent regulations state that if a firm hasa with-profits fund containing an excesssurplus, and to retain that surplus wouldbe a breach of the FCA’s and PRA’sPrinciple 6 (Customers’ interests), thenthe firm should make a distribution fromthat with-profits fund. If the WPSF wereto close to new with-profits business, it is


unlikely that there would be any immediate reduction in the requirement to maintainthe inherited estate as, in such circumstances, it is likely that it would be fully utilisedas working capital to support the in-force business.

5.1.7 In March 2007 Prudential announced that it was exploring the possibility of areattribution of the PAC inherited estate. After extensive assessment Prudential decided inJune 2008 that it would not proceed with a reattribution as it believes the currentoperating model for the WPSF is in the best long-term interests of both current and futurepolicyholders and shareholders.

5.1.8 The inherited estate in SAIF will be distributed to SAIF and SAA with-profitspolicyholders in accordance with the SAIF Principles of Financial Management whichare part of the Scheme approved by the court which transferred SALAS into PAC.

5.2 Principles

5.2.1 The company seeks to manage the PAC inherited estate held in the WPSFso that it continues to provide adequate working capital for the future security andongoing solvency of the With-Profits Fund.

5.2.2 The PAC Board manages the overall business having regard to the size ofthe PAC inherited estate. This reflects the inherited estate’s role as the workingcapital of the With-Profits Fund which largely determines the risk capacity of thefund. The inherited estate absorbs, at least in the short term, the impact of anysubstantial changes affecting the With-Profits Fund. There is no specific target forthe size of the PAC inherited estate.

5.2.3 The Scottish Amicable Board manages the overall risk level for SAIF in asimilar way, having regard to the existence of SACF, the size of the SAIF inheritedestate as a proportion of SAIF and the requirement to distribute the inheritedestate equitably as an addition to with-profits benefits.

5.3 Practices

5.3.1 The PAC inherited estate currently supports the with-profits business in-force,and the new with-profits business being written in the WPSF on the basis described insection 6 of the PPFM, by:

> providing the benefits associated with smoothing and guarantees,

> permitting investment flexibility for the sub-fund’s assets, and

> meeting the regulatory capital requirements, which demonstrate solvency.

Transfers to or from the PAC inherited estate occur every year as part of the normalprocess of smoothing pay-out values and as a consequence of the tax basis applicableto SAIF (see paragraph 1.3.7.3); larger transfers from the inherited estate may occur asa result of meeting guarantees in adverse investment conditions.

It is also used to support business inother sub-funds in return for anappropriate charge; for example itsupports SAIF and the DCPSF in returnfor a yearly charge.

5.3.2 The PAC inherited estate may alsobe used for any other purposes asconsidered appropriate by the Directors.This may include absorbing the costs ofsignificant events, such as fundamentalchange in its long-term business and thecost of providing redress for past mis-selling, without affecting the bonus andinvestment policies of existingpolicyholders. The costs of fundamentalchange may include investment in newtechnology, redundancy andrestructuring costs, regulatory and legalchange and the funding of otherappropriate activities related to long-terminsurance, including acquisitions.

5.3.2.1 Currently, the PAC inheritedestate bears the following costs:

> the additional tax payable by theWith-Profits Fund as a result ofthe distribution to shareholdersof their part of the WPSF divisibleprofit, as permitted by insurancecompany regulations, (seeparagraph 1.3.7.6), and

> in respect of business issued byScottish Amicable Life plc, any cost ofshareholder transfer in excess of thedifference between the level ofcharge deducted and the level ofexpenses incurred.

These items will continue to be charged tothe PAC inherited estate only for as longas the security of the sub-fund remainssatisfactory at the time the cost is paid.

Up to 31 December 2011 the PACinherited estate also bore the costs of anyexpenses written-off since 1997 (seeparagraph 1.3.7.8). However, from


1 January 2012 onwards, the PAC Boardhas decided that new business in theWPSF should be priced such that it isexpected to be financially self supportingover the lifetime of the business at thepoint the pricing assumptions are set.Where the business is not expected tobe financially self-supporting at the pointthe pricing assumptions are set,shareholders will make an appropriatecontribution to the WPSF (further detailon the test of self supporting is describedin section 6 below).

5.3.2.2 The PAC Board decided that thecosts associated with the PAC personalpensions mis-selling review wereabnormal and so should not impact onasset shares, and that they should be metfrom the PAC inherited estate.So that the resulting reduction in theinherited estate would have no adverseimpact on policyholder pay-out values,Prudential stated in 1998 that deductingpersonal pensions mis-selling costs fromthe inherited estate would not impact thecompany’s bonus or investment policy forWPSF policies. The company gave anassurance that if this unlikely event wereto occur, it would make available supportto the With-Profits Fund from shareholderresources for as long as the situationcontinued, so as to ensure that WPSFpolicyholders were not disadvantaged.

The assurance was designed to protectboth existing WPSF policyholders at thedate it was announced, and policyholderswho subsequently purchased policieswhile the pension mis-selling review wascontinuing. This review was completedon 30 June 2002 and consequently theassurance has not applied to new WPSF

business issued since 1 January 2004.New business in this context consists ofnew policies, new members to existingpension schemes plus regular and singlepremium top-ups, transfers and switchesto existing arrangements.

The assurance will continue to apply to any WPSF policy in force as at 31 December 2003, both for premiumspaid before 1 January 2004 and forsubsequent regular premiums (includingfuture fixed, retail price index or salary-related increases and Department forWork and Pensions rebates).

This assurance is achieved in practice bymonitoring the accumulated cost ofpersonal pension mis-selling, and addingthis amount back to the capital of thefund whenever the company is takingbonus or investment decisions. Thisaccumulated cost is calculated at anytime as the provision held in the WPSF inrespect of as yet unpaid potential futuremis-selling costs, plus the accumulatedvalue of past mis-selling costs, allowingfor the net investment return theseamounts would have earned had theyremained as free assets of the WPSF.

The amount of capital support availableunder the terms of the assurance willreduce over time as the company paysclaims on the policies covered by theassurance. The amount of capital supportreduces by the ratio of the current assetshare value of such policies remaining inforce at the calculation date, to the assetshare value, at 31 December 2003, of allpolicies then covered by the assuranceadjusted for the net investment returnearned on the asset shares since that date.

The bonus and investment policy foreach type of WPSF with-profits policy iscurrently the same irrespective ofwhether or not the assurance applies.Hence removal of the assurance for newbusiness has had no impact onpolicyholder returns and this is expectedto continue for the foreseeable future.

5.3.3 The investment strategy for thePAC inherited estate, excluding anyassets which would not normally betraded (see paragraph 2.3.6), isdetermined in accordance with theoverall investment strategy (see section2). The PAC inherited estate currentlyhas a different asset mix to that of theassets backing with-profits policies. Thisis to help meet guarantees and maintainregulatory solvency in adverse marketconditions. The asset mix of the PACinherited estate is regularly reviewed toensure it remains appropriate.

5.3.4 The investment strategy for theSAIF inherited estate is determined inaccordance with the overall investmentstrategy (see section 2) and the SAIFPrinciples of Financial Management (seeAppendix A). The SAIF inherited estatecurrently has a different asset mix to thatof the assets backing with-profits policies.The ability to have a different investmentmix allows the flexibility required in orderto help meet guarantees, maintainregulatory solvency and ensure the sub-fund is managed in a sound and prudentfashion, which is particularly importantduring adverse market conditions. The asset mix of the SAIF inherited estate is regularly reviewed to ensure it remains appropriate.


5.3.5 There is no specific target for thesize of the PAC inherited estate. However,a significant reduction in the size of thePAC inherited estate as a proportion of thewith-profits sub-funds, or a significantincrease in the with-profits sub-funds’regulatory capital requirements as aproportion of the inherited estate, wouldbe likely to result in the WPSF beingmaterially outside of its risk appetite. Arange of management actions would thenbe expected to be taken by the PACBoard in order to address this.

5.3.6 In accordance with the SALASScheme, the SAIF inherited estate will bedistributed progressively to SAIF andSAA with-profits policyholders as theybecome claims. When SAIF is eventuallymerged into the WPSF in accordancewith the SAIF Principles of FinancialManagement, the balance of the SAIFinherited estate will be attributed to theasset shares of the remaining SAIF andSAA with-profits policyholders.

Section 6 – Volumes of newbusiness and arrangements onstopping new business6.1. Introduction

6.1.1 PAC is currently open to new with-profits business, which may be written inthe UK or overseas in either the WPSF orthe DCPSF. SAIF is closed to newbusiness except for a small volume ofcontractual increases to existingarrangements. The operation of SAIF, asa closed sub-fund, is defined by the SAIFPrinciples of Financial Management.

6.1.2 PAC seeks to write new with-profitsbusiness in the WPSF in both the UK andoverseas which is expected to befinancially self supporting over thelifetime of the contracts at the point thepricing assumptions are set. Where thebusiness is not expected to be financiallyself-supporting at the point the pricingassumptions are set, shareholders willmake an appropriate contribution to theWPSF. Given this approach, when writingnew business, PAC is not constrained byany requirement to take into account theprospect that existing policyholders mightotherwise have of receiving a distribution,or a greater distribution, from the PACinherited estate in the event of an excesssurplus arising in the WPSF.

6.1.3 In considering whether newbusiness is self supporting, it should benoted that:

(i) the test of self supporting does notinclude the tax liability arising fromshareholder transfers on thatbusiness. As described in paragraph5.3.2.1 of the PPFM, this tax is paidfrom the WPSF’s inherited estatesubject to the security of the sub-fundremaining satisfactory at the time thetax is paid; and

(ii) new business may temporarily not beself supporting following a materialchange in the business environmentwhich is outside of the firm’s control.This reflects the fact that businesscannot necessarily be re-pricedimmediately, and that the change inbusiness environment (for example amarket fall) may, in good faith, bebelieved to only be temporary.

6.1.4 In this section we describe the wayin which we review limits on the quantityand type of new business accepted andthe actions we would take if we ceased to take on a significant amount of newbusiness.

6.2. Principles

6.2.1 The PAC Board manages thetypes and volumes of new businessaccepted as part of its management ofthe overall risk level of the companyand for the maintenance of theongoing solvency of the With-ProfitsFund.

6.2.2 In the event that the With-ProfitsFund became closed to with-profitsbusiness or the volume of new with-profits business became negligible, itwould be necessary to review theposition and put in place a plan for themanagement of the inherited estateover the long term. Any proposal forthe reattribution, or the ultimatedistribution, of any part of the inheritedestate between policyholders andshareholders would need to take intoaccount all the relevant factors andclaims on the estate.


6.3 Practices

6.3.1 As explained in section E of theintroduction to the PPFM, the PAC Boardmanages the types and maximumvolumes of new business accepted bythe company and its subsidiary, PIA,having regard to the WPSF’s riskappetite. If the WPSF was operatingmaterially outside of its risk appetite, thePAC Board would expect to take a rangeof management actions to address this.Reviewing the types and volumes of newbusiness being accepted by the with-profits sub-funds would typically be oneof the actions that would be taken.

6.3.2 There is no immediate prospect ofthe company closing the WPSF to newwith-profits business. Although it is noteasy to predict the circumstances underwhich such a decision would becomeappropriate, it might occur if the volume ofnew business declined to a negligible leveland there was no apparent prospect of thevolume recovering. However, if the WPSFwere to close to new with-profits business,it is unlikely that there would be anyimmediate reduction in the requirement tomaintain the inherited estate as, in suchcircumstances, it is likely that it would befully utilised as working capital to supportthe in-force business.

6.3.3 The directors of PAC may impose alimit on the size of investments held byone individual, if necessary to protect theWith-Profits Fund.

Section 7 – Equity betweenwith-profits policyholdersand shareholders7.1 Introduction

7.1.1 As with all proprietary with-profitssub-funds, the normal operation of theWPSF results in conflicts of interestarising between policyholders andshareholders, and between differentgroups of policyholders, and PAC seeksto resolve these conflicts of interest fairly.While the company remains open, andthe inherited estate remains fully utilisedin supporting current and expectedfuture new business, PAC recognises thefollowing interests:

(i) policyholders’ interests in relation tothe maintenance of their reasonablebenefit expectations, including thesecurity of their guaranteed benefits;and

(ii) shareholders’ interests in thecontinuing operation of the business,including writing new business, and managing the market, credit,insurance and other risks associatedwith that business.

7.1.2 PAC’s governing body will take theinterests of both policyholders andshareholders into account in decisions ittakes in relation to the operation of PAC’swith-profits business. This section of thePPFM describes how the PAC Directorsbalance the interests in the WPSF ofwith-profits policyholders andshareholders. Further information onhow the Directors manage conflicts ofinterest in relation to the inherited estate,and the writing of new business in theWPSF, is given in sections 5 and 6respectively of the PPFM.

7.1.3 In managing conflicts of interestbetween with-profits policyholders andshareholders, PAC’s philosophy is thatpolicyholders’ reasonable expectationsare created and influenced primarily bypolicy documents and other relevantmaterials that are published by PAC.Policyholders’ reasonable expectationsmay therefore evolve over time but, oncecreated, PAC’s Directors consider thatthe WPSF should be operated in a waythat has regard to those expectations.

7.1.4 As set out in section C of theintroduction to the PPFM, profits of SAIFand the DCPSF are attributable wholly topolicyholders, and profits of the NPSF arewholly attributable to shareholders.Therefore, issues of equity betweenpolicyholders and shareholders for thesesub-funds are largely confined to theequity of the expense apportionment(see section 4 of the PPFM).

7.2 Principles

7.2.1 The company seeks to treat allcustomers fairly at all times,balancing any conflicting intereststhat arise between the variousgroups and generations ofpolicyholders or betweenpolicyholders and shareholders.

7.2.2 The proportion, or minimumproportion, of the relevant divisibleprofit (as defined in paragraph 1.1.1)to be allocated to each type of with-profits policy is specified via the sub-fund structure, as describedin section C of the Introduction to the PPFM. The actual proportionapplicable in the WPSF may be variedfrom year to year, any substantialoverall reduction in the policyholders’proportion being subject to specificregulatory requirements.


7.3 Practices

7.3.1 Bonuses and pay-out values aredetermined as set out in section 1 andthe divisible profits are calculated, afterany transfer to a contingency fund, as an amount equal to the cost of bonuseson the regulatory reporting basis plus the associated shareholder transfer. For this purpose:

> the cost of regular bonuses is theamount added to policyholders'accounts, or in the case ofconventional with-profits business,the change in guaranteed liability onthe statutory reporting basis as aresult of the bonus addition, reducedby the cost of guaranteed bonuses onGroup Cash Accumulation business,

> the cost of final bonuses is generallythe amount paid on claims, net of anymarket value reduction, and

> the cost of bonus is adjusted for anydifference between the actual costand the expected cost of the previousyear’s bonuses, including the amountof final bonus allowed for in paid-uppolicy, surrender and transfer valuesafter the application of any MVR.

Taxation on all With-Profits Fund assets isprovided for (and in due course paidfrom) the appropriate sub-fund beforedetermination of the divisible profit. Theadditional tax payable by the With-ProfitFund as a result of the distribution toshareholders of their part of the WPSFdivisible profit is paid from the PACinherited estate (see paragraph 1.3.7.6).

− investments which, by the natureof the asset, could be a naturalpart of the investment portfolio(e.g. an initial investment in a newunit trust); these investments aremade subject to any additionalcosts or risks being compensatedfor appropriately, or

− investment in a subsidiary wherethe underlying business has similarrisks to insurance business whichthe With-Profits fund might writedirectly. The aggregate size ofsuch subsidiaries is limited by theconstraints implied by themanagement of the overall risklevel of PAC.

> from 1 January 2012, PAC will seek to price new with-profits business in the WPSF such that it is expectedto be financially self supporting (asdescribed in section 6) over thelifetime of the business at the pointthe pricing assumptions are set. As isfurther described in section 6, wherethe business is not expected to befinancially self-supporting at the pointthe pricing assumptions are set,shareholders will make an appropriatecontribution to the WPSF.

7.3.2 If the regulators change thestatutory reporting basis, which is used tocalculate the cost of bonus, the impactwould need to be assessed at that time.A change in the basis for calculating thecost of bonus would not normally lead toany change in the division of profitsbetween policyholders and shareholders;however, the allocation would bereviewed on any major change in thevaluation approach.

7.3.3 As part of treating with-profitscustomers fairly the PAC Board hasdetermined that:

> it may change the allocation of newnon-profit business between theWPSF and the NPSF; any suchamendments will not adversely affectthe rights of WPSF with-profitspolicyholders at the time of theamendment to share in the profitsfrom existing non-profit business thenwithin the WPSF;

> any transfer of assets or business outof the With-Profits fund or betweensub-funds which might affect with-profits policyholders must be at fairvalue (i.e. on market related terms);

> it will consider the suitability for theWith-Profits Fund of any investmentproposed for the benefit of thecompany as a whole and only acceptinto the With-Profits Fund:


Appendix A

Scottish Amicable InsuranceFunds – Principles of FinancialManagement (PFM)This appendix reproduces the Principlesof Financial Management defined in1997. The terminology used relates todocumentation agreed as part of theScheme of Transfer of SALAS businessand therefore differs from that used inthe Principles and Practices of FinancialManagement.

1. The affairs of the Scottish AmicableFunds shall be conducted in a soundand prudent fashion.

2. The investment and bonus policies forthe Scottish Amicable Insurance Fundshall have regard to the interests andexpectations (as modified by thisScheme) of the holders of Policiesallocated to the Scottish AmicableInsurance Fund, Excluded Policieswhich would have been so allocatedif they were Transferred Policies andUnitised With Profits Policies referredto in Paragraph 27.1 (RelevantPolicies) and shall be determined as ifthe Scottish Amicable Capital Fundrepresented free assets of theScottish Amicable Insurance Fund.Such investment and bonus policiesshall not be constrained in any wayother than by the financial position ofthe Scottish Amicable Funds and inaccordance with the principlesspecified in this Schedule.

3. The investment policy for the ScottishAmicable Funds:

(a) shall be substantially the same asthe investment policy followed forbusiness in the Other Long TermPAC Funds as appropriate to thenature of the liabilities, shall followsimilar investment principles, interms of asset allocations, to theOther Long Term PAC Funds andshall be conducted with a view toensuring so far as reasonablypracticable the same returns for policyholders of RelevantPolicies by asset class as forpolicyholders of the Other Long Term PAC Funds;

(b) shall have regard to any statementof intent on investment in equitiesmade in the Circular; and

(c) shall provide for maintaining themaximum equity backing ratiopossible subject to such constraintsas may be necessary to reduce therisk of statutory insolvency to asimilar level as for the Other LongTerm PAC Funds. The risk ofstatutory insolvency shall bedetermined on bases andassumptions which are no morecautious than those applied to theOther Long Term PAC Funds butthe Scottish Amicable Capital Fundshall be ignored to the extent thattaking it into account wouldotherwise permit a higher equitybacking ratio than the greater of (a)that of the Other Long Term PACFunds and (b) 85%.

4. The bonus policy for Relevant Policies:

(a) shall be determined by referenceto the financial position,performance and experience ofthe Scottish Amicable InsuranceFund as if the Scottish AmicableCapital Fund represented freeassets of the Scottish AmicableInsurance Fund, and in such amanner as to distribute equitablyall the assets of the ScottishAmicable Insurance Fund(including all future surplus arisingin the fund but excluding assets inthe Scottish Amicable CapitalFund) over the remaining life ofthe Relevant Policies;

(b) shall aim to distribute the surplusassets in the Scottish AmicableInsurance Fund in excess of thosealready earmarked for distribution to policyholders under ScottishAmicable's current bonus policyso as to provide a uniformpercentage enhancement(reassessed from time to time inaccordance with Paragraph 6below) to projected claim values,subject to adjustment for policieswhich have been in force for less than ten years;

(c) shall smooth payouts in a mannerconsistent with the selectedequity-oriented investment policyof the Scottish Amicable InsuranceFund, and the need to reduce toacceptable levels (determined onbases and assumptions which areno more cautious than thoseapplied to the Other Long TermPAC Funds), the expected cost ofoperating the smoothing policy ofthe Scottish Amicable InsuranceFund as described in Paragraph 9below; and


6. Payouts at maturity shall be targetedon 100% of Asset Shares with theaddition of an enhancement to reflectthe distribution or surplus assetsreferred to in Paragraph 4(b) above.

The level of enhancement shall be set at the Effective Date, and shall be reassessed at least triennially, to provide a uniform percentageenhancement to the projected claimvalues of all Relevant Policiesremaining in force at the time. The enhancement shall bedetermined by the AppointedActuary (since 1 January 2016, theChief Actuary) and approved by theMonitoring Actuary using the bestestimate at the time, on realisticassumptions, of the projected claimvalues and the value of futuremiscellaneous surplus (including anysurrender surplus), − and shallexclude any deficit or surplus on thesmoothing account referred to inParagraph 7 below.

7. A smoothing account shall bemaintained to which shall be creditedthe difference between claimpayments (excluding theenhancement described in Paragraph6 above) on Relevant Policies, andAsset Shares. A smoothing charge orallocation may be levied against, orcredited to, Asset Shares, and theamount of such charge or allocationshall be credited to, or deductedfrom, the smoothing account.

8. Subject to Paragraph 9 below, theintention at all times shall be to aimfor neither surplus nor deficit in thesmoothing account, and the level ofthe charge or allocation referred to inParagraph 7 above shall be

determined as the percentage perannum of Asset Shares, which isexpected to eliminate any deficit orsurplus on the smoothing accountover the remaining life of the policies,after allowing for smoothing costswhich may be expected to arise as aresult of guarantees or underlyingtrends in claim values. The charge orallocation shall be reassessed at leasttriennially, but in any event anycharge shall not exceed the amountset out in Paragraph 9 below.

9. The maximum charge shall be setprior to the Effective Date so that theexpected cost to the Other Long TermPAC Funds of smoothing in relation tothe Scottish Amicable Insurance Fundis equal to the greater of:

(a) the present value of 75% of thefees payable by the ScottishAmicable Insurance Fund to theOther Long Term PAC Funds inrespect of the Scottish AmicableCapital Fund, less the expectedcost to the Other Long Term PACFunds of any restrictions oninvestment freedom resultingfrom the provision of capitalsupport to the Scottish AmicableInsurance Fund by means of theScottish Amicable Capital Fund;and

(b) the present value of 35% of thefees payable by the ScottishAmicable Insurance Fund to theOther PAC Funds in respect of theScottish Amicable Capital Fund,calculated assuming that themaximum permitted amount ofthe Scottish Amicable CapitalFund is outstanding at all times.

(d) shall be such as to provide anattractive amount of guaranteedbonus for holders of RelevantPolicies consistent with theselected equity-orientedinvestment policy and the need toreduce to acceptable levels(determined on bases andassumptions which are no morecautious than those applied to theOther Long Term PAC Funds), therisk of statutory insolvency asdescribed in Paragraph 3(c) aboveand the expected cost of operatingthe smoothing policy of theScottish Amicable Insurance Fundas described in Paragraph 9 below.

5. Asset Share records shall bemaintained and referred to in setting bonus rates in order to ensure equity between differentgroups of policyholders.

Asset Shares shall be determined asat the Effective Date using ScottishAmicable's approach at 31 December1996 and shall be accumulated in thefuture using a consistent approach,by reference to the investmentperformance, expense and taxationexperience of the Scottish AmicableInsurance Fund.

The future accumulation of AssetShares shall include an allocation of0.25% per annum in respect ofmiscellaneous surplus from non-profitand unit-linked business, and anallocation or deduction of a smoothingcredit or charge determined inaccordance with the principlesreferred to in Paragraph 8 below.


10.The maximum smoothing charge shallbe agreed by the Appointed Actuaryof PAC and the Appointed Actuary ofScottish Amicable prior to theEffective Date, and in the event ofagreement not being reached by theEffective Date shall be referred forfinal determination to an Umpireappointed in accordance withSchedule 10.

The level of smoothing charge orallocation determined from time totime shall be determined (subject tothe maximum referred to in Paragraph9 above) by the Appointed Actuaryand shall be subject to approval bythe Monitoring Actuary.

11.Upon the merger of the ScottishAmicable Insurance Fund with theOther Long Term PAC Funds inaccordance with Paragraph 32 of the Scheme:

(a) the enhancement referred to inParagraph 6 above relating to theremaining Relevant Policies shallbe reassessed so that theremaining assets of the ScottishAmicable Insurance Fund plus theamount of any deficit in thesmoothing account together withthe value of future surplusprojected to arise in the ScottishAmicable Insurance Fund shall bedistributed to the remaining

Relevant Policies as a uniformenhancement to expected claimvalues by means of anenhancement to asset shares(such enhancement to bedetermined by the AppointedActuary and agreed by theMonitoring Actuary); and

(b) thereafter, the bonuses payableon the remaining Relevant Policiesshall be determined by referenceto the enhanced Asset Shares,accumulated at the rate ofinvestment return with additionsfor premiums and with deductionsfor expenses, taxation and riskbenefits which reflect theperformance and experience ofthe whole of the Long Term Fundand subject to the smoothingpolicy applied to other With-Profits Policies in the Long TermFund. Any further smoothingcharges which may be leviedagainst Asset Shares shall notexceed the maximum chargereferred to in Paragraph 9 above.For the avoidance of doubt, nodeductions shall be made inrespect of shareholder transfers orshareholder tax, and no furtherallocations shall be made inrespect of miscellaneous surplusor otherwise, other than the0.25% allocation referred to inParagraph 5 above.

Appendix B

ELAS With-Profits Annuities –Principles of FinancialManagementThis appendix reproduces the Principlesof Financial Management agreed as partof the Scheme of Transfer of ELASbusiness to PAC. The terminology usedrelates to documentation agreed as partof the Scheme of Transfer of ELASbusiness and therefore differs from thatused in the Principles and Practices ofFinancial Management. The Scheme isavailable on request.

1. The Transferring Policies BonusSeries

On the Effective Date, the Transferee willcreate a new bonus series (the"Transferring Policies Bonus Series") andthe Transferring Policies will be allocatedto and from the Transferring PoliciesBonus Series. The Transferring PoliciesBonus Series will not be merged oramalgamated with any other bonus seriesand no other policies, in whole or in part,will be allocated to the TransferringPolicies Bonus Series. None of theTransferring Policies will be transferredfrom the Transferring Policies BonusSeries at any time after the Effective Date.

2. Income after the Effective Date

2.1 Immediately following the EffectiveDate (and, for the avoidance of doubt,this reference to Effective Date shall referto the time and date in the definition of"Effective Date"):

(a) each Transferring Policy will have thesame level of Guaranteed Income as it had immediately prior to theEffective Date;


(b) each Transferring Policy will have alevel of Post-Smoothing Non-Guaranteed Income equal to the levelof Post-Smoothing Non-GuaranteedIncome in respect thereof immediatelyprior to the Effective Date; and

(c) until a new bonus rate is announcedby the Transferee with respect to theTransferring Policies on or after theEffective Date, any bonus rate,interim or otherwise, which isapplicable to the policy immediatelyprior to the Effective Date willcontinue to apply.

2.2 The rates from time to timedetermined by the Transferee as the ratesof Non-Guaranteed Bonus to be applied tothe Transferring Policies will be applied indetermining the Post-Smoothing Non-Guaranteed Income in respect of eachTransferring Policy in accordance with theestablished practice for the calculationthereof (being initially the establishedpractice of the Transferor but subject tochanges from time to time made by theTransferee consistently with applicable lawand regulation and with the consent of theTransferee With-Profits Committee).

3. Maintenance of separate AssetShares for the Transferring Policies

The Individual Asset Shares attaching tothe Transferring Policies shall bemaintained separately from the assetshares of all other policies of theTransferee. The Transferring Policies shallhave no exposure to, and shall incur noadjustment for, profits and losses arisingfrom the Transferee's other policies,experience or business activities (save tothe extent of unavoidable indirectexposure as a result of the effects of suchprofits and losses on the Transferee'soverall financial position).

4. Exhaustion of Aggregate AssetShare over the lifetime of theTransferring Policies

(a) The Transferee will determine theamounts of Pre-Smoothing Non-Guaranteed Income in respect of theTransferring Policies in a mannercalculated to exhaust the AggregateAsset Shares (including anyadjustment of the Aggregate AssetShare as a result of the AggregateAugmentation Amount) of theTransferring Policies over the lifetimeof the Transferring Policies, allowingfor the Transferee's expectations offuture mortality, in line with theTransferee PPFM from time to time.The Transferee will allow for itsexpectations of future mortality byusing a mortality basis which theTransferee With-Profits Committeeconfirms at the start of each calendaryear to be a best estimate basis forthe Transferring Policies (without any known margins for prudence) for expected mortality during the remaining lifetimes of theTransferring Policies.

(b) Bonuses announced and paid on the Transferring Policies will becalculated with the aim of fullydistributing the achieved returns on the underlying investments overthe time the Transferring Policies arein force, allowing for smoothing of the peaks and troughs of investmentperformance in accordance withparagraph 7 (Smoothing) of thesePrinciples of Financial Managementand other factors more fully described below.

(c) The Aggregate Asset Share held inthe Transferee DCPSF will only fundsuch part of any payment made undera Transferring Policy as constitutes the

Pre-Smoothing Non-GuaranteedIncome in respect of such payment,and not any additional amount bywhich the Guaranteed Income inrespect of such payment exceeds thePre-Smoothing Non-GuaranteedIncome in respect of such payment.

(d) For any Transferring Policy anIncurred Cost of Guarantee mayoccur whenever a payment is madeunder the policy. The Incurred Costof Guarantee in respect of anypayment is the Guaranteed Income inrespect of that payment less the Pre-Smoothing Non-Guaranteed Incomein respect of that payment, subject toa minimum of zero. The TransfereeWPSF shall pay the Incurred Cost ofGuarantee in respect of all paymentsunder Transferring Policies.

5. Investment return of the WPSFAsset Pool to be credited to theTransferring Policies

(a) The asset mix backing theTransferring Policies will be identicalto the asset mix of the TransfereeWPSF Asset Pool.

(b) The Aggregate Asset Share will becredited in each year by a rate ofinvestment return which (beforededuction of charges and adjustmentsfor any tax liability or credit inaccordance with applicable taxlegislation, but net of unrecoverabletax) is the same as the rate ofinvestment return earned by theTransferee on the Transferee WPSFAsset Pool (net of unrecoverable tax)(the "Gross Rate of InvestmentReturn"), and the Individual AssetShare of each Transferring Policy shallbe credited accordingly.


(c) In determining the investment returnto be credited to the Individual AssetShare of any Transferring Policy, theTransferee may adjust the Gross Rateof Investment Return for any taxliability or credit of the Transfereearising out of or in consequence ofthat Transferring Policy in accordancewith applicable tax legislation which isproperly allocable to suchTransferring Policy.

(d) In determining the Gross Rate ofInvestment Return, the Transferee willnot treat the Transferring Policies lessfavourably than it treats other policiesfor which the crediting of investmentreturn to asset shares is determinedby reference to the investment returnof the Transferee WPSF Asset Pooland will not make adjustments formiscellaneous profits or losses or onaccount of smoothing.

(e) Except as required by paragraph 8 ofthese Principles of FinancialManagement, the Transferee will notapply different rates of Non-Guaranteed Bonus to differentTransferring Policies and will notapply different rates of GuaranteedBonus to different TransferringPolicies having the same GIR.

(f) Asset pools other than the TransfereeWPSF Asset Pool, with asset mixesdifferent to the Transferee WPSFAsset Pool, may operate within theTransferee WPSF for certain specificcategories of business but theTransferring Policies will notparticipate in the investment return ofsuch asset pools.

6. Mortality experience

(a) To the extent that actual payments ofincome on the Transferring Policies areless or more than expected in anycalendar year because of heavier orlighter mortality than expected, theprofit or loss shall be for the account ofthe Transferee WPSF, and suchtransfers shall be made between theTransferee DCPSF and the TransfereeWPSF as are necessary to achieve this.

(b) For the purposes of determining whatannuity payments on the TransferringPolicies are "expected" to be made inany period for the purposes ofparagraph 6(a), the Transferee shalluse the mortality basis or acombination of mortality bases whichthe Transferee With-ProfitsCommittee has confirmed in advanceof and for purposes of that period tobe a best estimate basis or bestestimate bases for the TransferringPolicies (without any known marginsfor prudence) for expected mortalityduring the remaining lifetimes of theTransferring Policies, and for thispurpose the Transferee will ensurethat the Transferee With-ProfitsCommittee gives such a confirmationfor an appropriate period not lessthan once per year and that, in so faras they relate to the same period, themortality basis confirmed is the sameas the mortality basis confirmed bythe With-Profits Committee forpurposes of paragraph 4(a).

(c) At the end of each calendar year, theTransferee shall adjust the IndividualAsset Shares of all the TransferringPolicies which remain in force at thattime in a manner which redistributesamongst those remaining policies, in amanner which is fair to all holders

of those remaining policies havingregard to these Principles of FinancialManagement, the amount of theIndividual Asset Shares that wouldhave been released or reduced if the actual incidence of deaths ofTransferring Annuitants during suchcalendar year had exactly matchedthe expectations included in themortality basis or mortality bases used for expected mortality in thatcalendar year in accordance withparagraph 6(b) of these Principles of Financial Management.

(d) Subject to paragraph (e), theTransferee may from time to timeadopt a different mortality basis for its management of the TransferringPolicies representing its changedexpectations of future mortality andthe lifetime of Transferring Policiesover which Individual Asset Sharesare expected to be distributed in the form of Pre-Smoothing Non-Guaranteed Income.

(e) The Transferee may only adopt adifferent mortality basis for itsmanagement of the TransferringPolicies if the Transferee With-ProfitsCommittee has given its consent,which the Transferee With-ProfitsCommittee will only give if:

(i) it is satisfied that the new mortalitybasis to be adopted by theTransferee is fair to both theTransferring Policies and theTransferee WPSF and represents abest estimate basis for theexpected future mortalityexperience of the TransferringPolicies;


(ii) in forming its assessment foradopting a different basis(including for the purposes ofparagraph (i) above), it has takeninto account the historic mortalityexperience of the TransferringPolicies as well as the expectedfuture mortality experience of theTransferring Policies.

(f) Where the Transferee adopts adifferent mortality basis for itsmanagement of the TransferringPolicies, the following provisions mayrequire a payment to be made fromthe Transferee WPSF to theTransferee DCPSF or from theTransferee DCPSF to the TransfereeWPSF. On each occasion whenthe Transferee adopts a differentmortality basis for its managementof the Transferring Policies, theTransferee With-Profits Committeeshall consider whether the followingprovisions apply.

(g) The Estimated Mortality Change shallbe calculated, being the amountgiven by:

(i) the Aggregate Policy Value at thetime of the change in mortalitybasis, calculated using the CoreReserving Basis, including themortality basis included in theCore Reserving Basis;

MINUS

(ii) the Aggregate Policy Value at thetime of the change in mortalitybasis, calculated using the CoreReserving Basis but with themortality basis therein replaced bythe new mortality basis.

(h) Where the Estimated Mortality Changeis positive, the Mortality Impact shall becalculated as the percentage ratewhich, if applied on a compound basisas an annual increase to Post-Smoothing Non-Guaranteed Incomefrom the time of the change inmortality basis onwards, wouldproduce an increase in the AggregatePolicy Value equal to the EstimatedMortality Change (this valuation to becarried out using the Core ReservingBasis, but with the mortality basistherein replaced by the new mortalitybasis).

(i) Where the Estimated MortalityChange is negative, the MortalityImpact shall be calculated as thepercentage rate which, if applied on a compound basis as an annualreduction to Post-Smoothing Non-Guaranteed Income from the time ofthe change in mortality basisonwards, would produce a reductionin the Aggregate Policy Value equal tothe absolute value of the EstimatedMortality Change (this valuation to be carried out using the CoreReserving Basis, but with themortality basis therein replaced by the new mortality basis).

(j) If the first such Mortality Impact isless than or equal to 0.50% perannum then the Non-ChargeableMortality Transfer Amount will bezero and no payment shall be due inrespect of it from the TransfereeWPSF or the Transferee DCPSF.

(k) If the first such Mortality Impact isgreater than 0.50% per annum thenthe Non-Chargeable MortalityTransfer Amount will be calculated inaccordance with paragraph 6(l) ofthese Principles of FinancialManagement, and:

(i) if the Non-Chargeable MortalityTransfer Amount is negative, theTransferee WPSF will pay to theTransferee DCPSF an amountequal to the absolute value of theNon-Chargeable MortalityTransfer Amount, and theAggregate Asset Share shall beincreased by the absolute value of the Non-Chargeable MortalityTransfer Amount and theIndividual Asset Share of eachTransferring Policy shall beincreased proportionately; and

(ii) if the Non-Chargeable MortalityTransfer Amount is positive, theTransferee DCPSF will pay to theTransferee WPSF an amount equalto the Non-Chargeable MortalityTransfer Amount, and theAggregate Asset Share shall bereduced by the Non-ChargeableMortality Transfer Amount and theIndividual Asset Share of eachTransferring Policy shall bereduced proportionately.

(l) The Non-Chargeable MortalityTransfer Amount will be zero if theMortality Impact is less than or equalto 0.50% per annum. Otherwise, theNon-Chargeable Mortality TransferAmount will be calculated as theamount given by:

(i) the Aggregate Policy Value at thetime of the change in mortalitybasis calculated using the CoreReserving Basis, including themortality basis included in theCore Reserving Basis;

MINUS

(ii) the Aggregate Policy Value at thetime of the change in mortalitybasis calculated using the CoreReserving Basis but with the


mortality basis therein replaced bythe new mortality basis andassuming, where the EstimatedMortality Change is positive, thatan annual compound increase of0.5% per annum is applied to thePost-Smoothing Non-GuaranteedIncome from the time of thechange in mortality basis onwardsor, where the Estimated MortalityChange is negative, that an annualcompound reduction of 0.5% perannum is applied to the Post-Smoothing Non-GuaranteedIncome from the time of thechange in mortality basis onwards.

(m) Whenever a change is made to themortality basis, the Mortality Impactshall be recalculated; the newMortality Impact shall replace, notadd to, any previous Mortality Impact,save that the previous MortalityImpact shall be used as described inparagraph 6(n)(i) below.

(n) In the event that there has been achange in mortality basis whichresulted in a Non-ChargeableMortality Transfer Amount which wasnot zero and the mortality basis issubsequently changed again, thefollowing will be calculated at thetime of that subsequent change to themortality basis:

(i) the Non-Chargeable MortalityTransfer Amount that would applyfor a change of the mortality basisfrom the mortality basis includedin the Core Reserving Basis to thethen current mortality basis asthough it were the first and onlychange in mortality basis since the

Effective Date, but based on theMortality Impact calculated at thetime of the previous change("NCMTACurrent"); and

(ii) the Non-Chargeable MortalityTransfer Amount that would applyfor a change of the mortality basisfrom the mortality basis includedin the Core Reserving Basis to thenew mortality basis as though itwere the first and only change inmortality basis since the EffectiveDate ("NCMTANew").

If NCMTACurrent is greater than orequal to NCMTANew then a paymentshall be made to the TransfereeDCPSF from the Transferee WPSF inan amount given by:

(1) NCMTACurrent;

MINUS

(2) NCMTANew,

and the Aggregate Asset Share shallbe increased by the amount of thepayment, and the Individual AssetShare of each Transferring Policy shallbe increased proportionately.

If NCMTACurrent is less thanNCMTANew then a payment shall bemade from the Transferee DCPSF tothe Transferee WPSF in an amountequal to the absolute value of theamount given by:

(3) NCMTANew;

MINUS

(4) NCMTACurrent,

and the Aggregate Asset Share shallbe reduced by the amount of thepayment and the Individual AssetShare of each Transferring Policy shallbe reduced proportionately.

This process will be repeated everytime there is a change in the mortalitybasis used by the Transferee for itsmanagement of the TransferringPolicies.

7. Smoothing

7.1 Under normal circumstances,smoothing shall be applied in respect ofthe Transferring Policies according to thefollowing principles:

(a) Smoothing will operate to ensure thatthe amount of Post-Smoothing Non-Guaranteed Income in respect of aTransferring Policy, before allowingfor the impact of the GuaranteedIncome, shall not:

(i) in the case of Low Start AnnuityPolicies:

(1) fall below its then currentamount from time to time; or

(2) rise above its then currentamount from time to time in anyyear by a percentage greaterthan the Smoothing Cap;

(ii) in the case of Transferring Policiesother than Low Start AnnuityPolicies:

(1) fall below its then currentamount from time to time inany year by a percentageexceeding the percentagegiven by:


where:

"ABR" means the anticipatedbonus rate applicable underthat Transferring Policy,expressed as a decimal; and

"GIR" means the guaranteedinterest rate applicable underthat Transferring Policy,expressed as a decimal; or

(2) rise above its then currentamount from time to time inany year by a percentageexceeding the percentagegiven by:

where:

"SC" means the Smoothing Cap,expressed as a decimal; and "ABR"and "GIR" have the meaningsgiven in paragraph 7.1(a)(ii)(1).

(b) The Smoothing Cap, which shall becapable of alteration by theTransferee with the approval of theTransferee With-Profits Committee,will initially be 11%. The level of theSmoothing Cap will be stated as apractice in the Transferee's PPFM.

(c) Smoothing will also be applied asnecessary to ensure the objective ofgradual, rather than erratic, changesin bonus rates.

7.2 Greater flexibility in smoothing thanis permitted by paragraph 7.1 of thesePrinciples of Financial Management maybe required in certain circumstances, forexample following a significant fall or risein market values (either sudden or over aperiod of years). In such situations, theTransferee may decide to vary the bonussmoothing limits referred to in paragraph7.1 to protect the overall interests of allpolicyholders of the Transferee. Whendetermining whether smoothing rulesand limits for the Transferring Policiesshould be changed, the Transferee willapply the same principles as it would forother with-profits business as stated inthe Transferee PPFM from time to time,taking account of the balance of theTransferring Policies Smoothing Account.

7.3 The Transferee shall follow thefollowing practices in respect of theTransferring Policies:

(a) The Transferring Policies SmoothingAccount will be held within theTransferee WPSF and will contain anominal balance denominated inpounds sterling at all times (whichbalance may be positive or negative).

(b) Subject to paragraph 7.3(c) of thesePrinciples of Financial Management:

(i) where the Pre-Smoothing Non-Guaranteed Income in respect ofthe Transferring Policies exceedsthe Post-Smoothing Non-Guaranteed Income in respect ofthe Transferring Policies, thebalance of the TransferringPolicies Smoothing Account willincrease by the amountdetermined in accordance withparagraph 7.3(e) or 7.3(f) of thesePrinciples of FinancialManagement, as applicable; and

(ii) where the Pre-Smoothing Non-Guaranteed Income in respect ofthe Transferring Policies is lessthan the Post-Smoothing Non-Guaranteed Income in respect ofthe Transferring Policies, thebalance of the TransferringPolicies Smoothing Account willdecrease by the amountdetermined in accordance withparagraph 7.3(e) or 7.3(f) of thesePrinciples of FinancialManagement, as applicable.

(c) Except as provided in paragraph 7.3(h)of these Principles of FinancialManagement, the amount held in theTransferring Policies SmoothingAccount will change if and only if theapplication of smoothing changes apayment actually made under aTransferring Policy from the amountthat it would have been if smoothinghad not been applied – by comparing(i) the higher of the GuaranteedIncome and the Post-Smoothing Non-Guaranteed Income in respect of theTransferring Policies with (ii) the higherof the Guaranteed Income and the Pre-Smoothing Non-Guaranteed Income inrespect of the Transferring Policies.

(d) For any Transferring Policy at any timewhere a payment is made which isaffected by the application ofsmoothing, the Pre-SmoothingPayment Amount shall be equal to thehigher of the Guaranteed Income inrespect of that payment and the Pre-Smoothing Non-Guaranteed Incomein respect of that payment. The Post-Smoothing Payment Amount shall beequal to the higher of the GuaranteedIncome in respect of that payment andthe Post-Smoothing Non-GuaranteedIncome in respect of that payment.

100% x 11 –(1 + ABR) x (1 + GIR)

100% x (1+SC) – 1(1 + ABR) x (1 + GIR){[ ]

[ ]

}


If the Pre-Smoothing PaymentAmount is not equal to the Post-Smoothing Payment Amount thereshall be a Smoothing Cost associatedwith the application of smoothing inrelation to that payment.

(e) Where there is a Smoothing Costassociated with the application ofsmoothing in relation to a paymentand the Guaranteed Income inrespect of that payment is less thanthe Pre-Smoothing Non-GuaranteedIncome in respect of that payment,the Smoothing Cost shall be equal to:

(i) the greater of the GuaranteedIncome in respect of that paymentand the Post-Smoothing Non-Guaranteed Income in respect ofthat payment;

LESS

(ii) the Pre-Smoothing Non-Guaranteed Income in respect ofthat payment.

(f) Where there is a Smoothing Costassociated with the application ofsmoothing in relation to a paymentand the Guaranteed Income inrespect of that payment is greaterthan the Pre-Smoothing Non-Guaranteed Income in respect of thatpayment, the Smoothing Cost shall beequal to:

(i) the Post-Smoothing Non-Guaranteed Income in respect ofthat payment;

LESS

(ii) the Guaranteed Income in respectof that payment, subject to aminimum Smoothing Cost of zero.

(g) Any Smoothing Cost, positive ornegative, shall be DEDUCTED fromthe balance of the TransferringPolicies Smoothing Account (so thatthe balance of the account is reducedwhere the Smoothing Cost is positiveand increased where the SmoothingCost is negative).

(h) The Transferring Policies SmoothingAccount will itself be adjusted by the Gross Rate of Investment Returnand adjusted for any other tax liabilityor credit of the Transferee arising out of or in consequence of theTransferring Policies in accordancewith applicable tax legislation, andreduced by charges as provided inparagraph 9.1(b) of these Principlesof Financial Management.

(i) The Transferring Policies SmoothingAccount will have a value of zero atthe Effective Date, and shall bemanaged with the ongoing aim that itshould always tend to zero, subject tothe need for short-term smoothing.

8. Deferred Cost Policies

The Transferee will make deductions frombonuses on Deferred Cost Policies of 0.5per cent per annum for 2008, 2009 and2010 (consistently with the practice of theTransferor prior to the Effective Date).

9. Charges

9.1 Notwithstanding any provisionscontained in the policy conditions of theTransferring Policies and anyrepresentations, warranties orundertakings made before the EffectiveDate in relation to the TransferringPolicies by any person other than theTransferee, the Transferee may imposecharges on each Transferring Policy onthe basis set out below:

(a) by way of arithmetic deduction fromthe gross investment return thatwould otherwise be credited to theIndividual Asset Share of suchTransferring Policy:

(i) 1.0% per annum of the IndividualAsset Share throughout thelifetime of the policy for expenses,to be credited to the TransfereeNPSF; and

(ii) a maximum of 0.5% per annum ofthe Individual Asset Sharethroughout the lifetime of thepolicy for the expected cost ofguarantees, to be credited to theTransferee WPSF; and

(b) by way of arithmetic deduction fromthe gross investment return thatwould otherwise be applied to theTransferring Policies SmoothingAccount of:

(i) 1.0% per annum of the balance ofthe Transferring PoliciesSmoothing Account for expenses,to be credited to the TransfereeNPSF (or debited to theTransferee NPSF where thebalance of the TransferringPolicies Smoothing Account isnegative); and

(ii) a maximum of 0.5% per annum ofthe balance of the TransferringPolicies Smoothing Account forthe expected cost of guarantees,to be credited to the TransfereeWPSF (or debited to theTransferee WPSF where thebalance of the Transferring PoliciesSmoothing Account is negative).


9.2 These charges may be appliedirrespective of whether the GuaranteedIncome in respect of the TransferringPolicy exceeds the Pre-Smoothing Non-Guaranteed Income in respect of theTransferring Policy.

9.3 Subject to paragraphs 9.4 and 9.5, noother charges will be imposed on anyTransferring Policy (whether bydeduction from the Individual AssetShares or the Aggregate Asset Share orfrom the Transferring Policies SmoothingAccount or from bonuses or from grossinvestment return or otherwise),including without limitation in respect ofinvestment management, transactionexpenses arising from the transfer of theTransferring Policies to the Transferee,capital support provided for the benefitof such policies, whether from theTransferee WPSF or otherwise, ormortality (but without prejudice to anyrequirement for the Transferee DCPSF tomake payment to the Transferee WPSF inaccordance with paragraph 6 of thesePrinciples of Financial Management).

9.4 Paragraph 9.3 shall not prevent theTransferee from determining the grossinvestment return for the TransferringPolicies in the same manner as itdetermines the gross investment returnfor other policies for which the creditingof investment return to asset shares isdetermined by reference to theinvestment return of the TransfereeWPSF Asset Pool, provided that indetermining the gross investment returnfor the Transferring Policies theTransferee shall make no deduction inrespect of investment management,transaction expenses arising from the

transfer of the Transferring Policies to theTransferee, capital support provided forthe benefit of such policies, whetherfrom the Transferee WPSF or otherwise,or mortality (but without prejudice to anyrequirement for the Transferee DCPSF tomake payment to the Transferee WPSF inaccordance with paragraph 6 of thesePrinciples of Financial Management).

9.5 Notwithstanding this paragraph 9,the Transferee may make deductionsfrom the Aggregate Asset Share or fromthe gross investment income that wouldotherwise be credited thereto:

(a) in accordance with paragraph 16.7 ofthe Scheme; or

(b) where it has suffered a loss inconnection with the transfer to it of theWPA Business in respect of which ithas a claim against the Transferor and,in the opinion of the Transferee With-Profits Committee, it is proper for all orpart of such loss to be absorbed by theTransferring Policies because theywould otherwise retain an improperbenefit as a result of the circumstanceswhich gave rise to the loss.

9.6 Without prejudice to future creditingto the Transferee NPSF of chargesdeducted under paragraph 9.1(a)(i) or9.1(b)(i) of these Principles of FinancialManagement, any crediting of chargesfrom the Transferee NPSF to theTransferee WPSF in accordance withparagraph 9.1(b)(i) will not give rise toany requirement for subsequentreimbursement to the Transferee NPSF.

10. Changes in charges forguarantees

(a) ReductionIf, at any time after the Effective Date, theTarget Equity Backing Ratio is reduced bya material amount (being a reduction ofthe Target Equity Backing Ratio below apercentage which is an integral multiple of5) either in a single step or series of stepsthen the reduction will be notified to theTransferee With-Profits Committee. TheTransferee will produce recommendationsas to whether there should be a reductionin the on-going charges for guarantees forthe Transferring Policies, and by howmuch they should be reduced, and theTransferee With-Profits Committee willreview the Transferee’s recommendationsand consider whether the on-goingcharges for guarantees should bereduced. Any resulting reduction shall beapplied on a consistent basis as betweenthe Transferring Policies and theTransferee's other with-profits policies.

(b) IncreaseIf the ongoing charges for guaranteesapplied to the Transferring Policies havebeen reduced below the maximum level of0.5% per annum pursuant to paragraph10(a) of these Principles of FinancialManagement and subsequently the TargetEquity Backing Ratio is increased by amaterial amount (being an increase of theTarget Equity Backing Ratio above apercentage which is an integral multiple of5) either in a single step or a series of stepsthen the increase will be notified to theTransferee With-Profits Committee. TheTransferee will produce recommendationsas to whether there should be an increasein the on-going charges for guarantees forthe Transferring Policies, and by how muchthey should be increased, and the


Transferee With-Profits Committee willreview the Transferee’s recommendationsand consider whether the on-goingcharges for guarantees should beincreased. Any resulting increase shall beapplied on a consistent basis as betweenthe Transferring Policies and theTransferee's other with-profits policies,save that the increase of the on-goingcharges for guarantees applied to theTransferring Policies will not be such as toincrease these charges above themaximum level of 0.5% per annumpermitted by paragraph 9 (Charges) ofthese Principles of Financial Management.

(c) Review of guarantee chargesAny review of the on-going charges forguarantees which is applied to any of theTransferee's with-profits policies will alsoinclude, on a consistent basis, a review ofthe on-going charges for guaranteesapplied to the Transferring Policies, ineach case taking into account the amountof any up-front guarantee charge(including, in the case of the TransferringPolicies, the Post-Augmentation Up-frontGuarantee Charge). The Transferee willproduce recommendations as to whetherthere should be an increase or areduction in the on-going charges forguarantees for the Transferring Policies,and by how much they should beincreased or reduced, and the TransfereeWith-Profits Committee will review theTransferee’s recommendations andconsider whether the on-going chargesfor guarantees should be increased orreduced. Any resulting increase orreduction in those charges as a result ofsuch a review will be applied on aconsistent basis as between theTransferring Policies and the Transferee's

other with-profits policies, save that anyincrease in the on-going charges forguarantees applied to the TransferringPolicies will not be such as to increasethese charges above the maximum levelof 0.5% per annum permitted byparagraph 9 (Charges) of these Principlesof Financial Management.

11. Amendment of terms ofmanagement of the TransferringPolicies

The terms on which the Transferee willbe permitted to manage the TransferringPolicies may be amended in any of thefollowing circumstances:

(a) to the extent required to facilitate arestructuring of the long-terminsurance fund of the Transfereeprovided that paragraphs 4, 5, 6, 8, 9and 10 of these Principles of FinancialManagement are not amended, savethat references to the TransfereeWPSF and the Transferee NPSF maybe replaced by references to anyother funds or sub-funds of theTransferee, and provided that theeffect of this Schedule is not changedto the material detriment of theTransferring Policies;

(b) at any time after 2009 provided thatparagraphs 4, 5, 6, 8, 9 and 10 ofthese Principles of FinancialManagement are not amended, savethat references to the TransfereeWPSF and the Transferee NPSF maybe replaced by references to anyother funds or sub-funds of theTransferee, and provided that theeffect of these Principles of FinancialManagement is not changed to thematerial detriment of the TransferringPolicies; or

(c) to the extent required in order toenable the Transferee to comply withapplicable law and regulation.

Any such amendment will require theapproval of the Transferee With-ProfitsCommittee and will be notified to theFSA in advance of the amendment taking effect.

12. Application to Excluded Policies

These Principles of Financial Managementshall apply mutatis mutandis to themanner in which the Transferee isrequired to carry out its obligations inrespect of the Excluded Policies under theExcluded Policies ReassuranceAgreement and, except to the extent thatthe context otherwise requires, eachreference in these Principles of FinancialManagement to the "Transferring Policies"shall be treated as being a reference toboth the Transferring Policies and theExcluded Policies.

13. Interim arrangements

These Principles of FinancialManagement are subject, in respect ofthe first year following the Effective Date,to the Interim Arrangements.

14. Application of Uplift

(a) On the Income Uplift Date, theAggregate Asset Share of theTransferring Policies will be amendedin accordance with paragraph 16.3(b)or paragraph 16.4 of the Scheme, as applicable.

(b) Where the Aggregate AugmentationAmount is positive, the bonusesannounced by the Transferee inrespect of the Transferring Policies in2009 shall be increased to distributean amount corresponding to the fullamount of the benefit received by the


Transferee by reason of havingreceived the Transferring Assets onthe Effective Date but not havinguplifted the Post-Smoothing Non-Guaranteed Income in respect thereofuntil the Income Uplift Date.

(c) Where the Aggregate AugmentationAmount is negative, paragraph 16 ofthe Scheme will not result in a changein Post-Smoothing Non-GuaranteedIncome. Accordingly, in the absenceof this paragraph 14(c), the Post-Smoothing Non-Guaranteed Incomein respect of the Transferring Policieswould exceed the amounts that theAggregate Asset Share wouldnormally have supported inaccordance with these Principles ofFinancial Management. The amountof any resulting overpayments ofincome may be recovered by theTransferee by:

(i) reducing future bonuses of theTransferring Policies; and/or

(ii) with the approval of theTransferee With-ProfitsCommittee, reducing the Post-Smoothing Non-GuaranteedIncome in respect of theTransferring Policies at any timeon or after the Income Uplift Date.

15. Relaxation of the Scheme

(a) Other than paragraph 6 of thisScheme, paragraph 9 (Charges) ofthese Principles of FinancialManagement, paragraph 14 of thisScheme (to the extent necessary tocause paragraph 9 (Charges) of thesePrinciples of Financial Management tocontinue to apply) and any provisionrequired for the interpretation of theforegoing paragraphs, all of whichshall continue to apply until all of theTransferring Policies have terminated,the Scheme shall, at the election ofthe Transferee, cease to apply at anytime after the realistic liabilities of theTransferring Policies have fallen belowthe Minimum Threshold Amount.

(b) Where the Transferee elects that theScheme shall cease to apply underparagraph 15(a) of these Principles ofFinancial Management, any positiveamount allocated to the TransferringPolicies Smoothing Account will bedistributed amongst the TransferringPolicies by way of an enhancement tothe Post-Smoothing Non-GuaranteedIncome in respect thereof in a mannerconsidered to be fair in all thecircumstances by the TransfereeWith-Profits Committee.

16. Interest in the inherited estate ofthe Transferee WPSF

The Transferring Policies will have nointerest in any possible future distributionor reattribution of the inherited estate ofthe Transferee WPSF.


PruFund Range of FundsThe PruFund Range of Funds consists of the investment funds given in the table below along with the products that can invest inthese funds.

PruFund Funds Products that can invest in this fund

PruFund Growth Pension/ISA Fund

Prudential Flexible Retirement Plan, Trustee Investment Plan, Prudential ISA, PrudentialRetirement Account

PruFund Cautious Pension/ISA Fund

Prudential Flexible Retirement Plan, Trustee Investment Plan, Prudential ISA, PrudentialRetirement Account

PruFund Growth Fund PruFund Investment Plan, Prudential Investment Plan, Flexible Investment Plan

PruFund Growth & Income Fund PruFund Investment Plan

PruFund Cautious Fund Flexible Investment Plan, Prudential Investment Plan

PruFund 0-30 Fund* Flexible Investment Plan, Prudential Investment Plan

PruFund 0-30 Pension/ISA Fund* Prudential Flexible Retirement Plan, Trustee Investment Plan, Pension Choices Plan,Prudential ISA, Prudential Retirement Account


PruFund 10-40 Pension/ISA Fund* Prudential Flexible Retirement Plan, Trustee Investment Plan, Pensions Choices Plan,Prudential ISA, Prudential Retirement Account


PruFund 20-55 Pension/ISA Fund*

Prudential Flexible Retirement Plan, Trustee Investment Plan, Pensions Choices Plan,Prudential ISA, Prudential Retirement Account


PruFund 40-80 Pension/ISA Fund*

Prudential Flexible Retirement Plan, Trustee Investment Plan, Pension Choices Plan,Prudential ISA, Prudential Retirement Account

PruFund Growth (Sterling) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Cautious (Sterling) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Growth (Euro) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Cautious (Euro) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Growth (US Dollar) Fund International Prudence Bond. Prudential International Investment Bond

PruFund Cautious (US Dollar)Fund International Prudence Bond. Prudential International Investment Bond

Appendix C

'* These funds are collectively known as the Risk Managed PruFunds.

Note that a fund labelled Pension/ISA refers to single PruFund fund that uses two different names depending on the type ofproduct through which it is accessed. For example the fund is named PruFund Growth Pension Fund when accessed through apensions product and the same fund is named PruFund Growth ISA Fund when accessed through an ISA.

For the purposes of suspension of smoothing, the PruFund Range of Funds are split such that smoothing can be suspended on eachclass of business independently of the others. This split is given in the following table:


PruFund Funds Products that can invest in this fund

PruFund Growth Pension/ISA Fund Prudential Flexible Retirement Plan, Trustee Investment Plan, Prudential ISA

PruFund Growth Pension Fund Prudential Retirement Account

PruFund Cautious Pension/ISA Fund Prudential Flexible Retirement Plan, Trustee Investment Plan, Prudential ISA

PruFund Cautious Pension Fund Prudential Retirement Account

PruFund Growth Fund PruFund Investment Plan, Prudential Investment Plan, Flexible Investment Plan

PruFund Growth & Income Fund PruFund Investment Plan

PruFund Cautious Fund Flexible Investment Plan, Prudential Investment Plan

PruFund 0-30 Fund Flexible Investment Plan, Prudential Investment Plan

PruFund 0-30 Pension/ISA Fund Prudential Flexible Retirement Plan, Trustee Investment Plan, Pension Choices Plan,Prudential ISA

PruFund 0-30 Pension Fund Prudential Retirement Account


PruFund 10-40 Pension/ISA Fund Prudential Flexible Retirement Plan, Trustee Investment Plan, Pensions Choices Plan,Prudential ISA



PruFund 20-55 Pension/ISA Fund Prudential Flexible Retirement Plan, Trustee Investment Plan, Pensions Choices Plan,Prudential ISA



PruFund 40-80 Pension/ISA Fund Prudential Flexible Retirement Plan, Trustee Investment Plan, Pension Choices Plan,Prudential ISA


PruFund Growth (Sterling) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Cautious (Sterling) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Growth (Euro) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Cautious (Euro) Fund International Prudence Bond, Prudential International Investment Bond

PruFund Growth (US Dollar) Fund International Prudence Bond. Prudential International Investment Bond

PruFund Cautious (US Dollar)Fund International Prudence Bond. Prudential International Investment Bond


Abbreviation Definition

ABR Anticipated Bonus Rate (applicable to With-Profits annuity only)

AMC Annual Management Charge

CFPPFM Consumer Friendly Principles and Practices of Financial Management

CLE Canada Life Assurance Europe Limited

COBS Conduct of Business Sourcebook

DCPSF Defined Charge Participating Sub-Fund

ELAS Equitable Life Assurance Society

FCA Financial Conduct Authority

FSA Financial Services Authority (replaced by PRA and FCA in 2013)

GIR Guaranteed Interest Rate (applicable to ELAS annuity only)

IRR Interim Rate of Return (applicable to ELAS annuity only)

NPSF Non-Profit Sub-Fund

ORR Overall Rate of Return (applicable to ELAS annuity only)

PAC The Prudential Assurance Company Limited

PAL Prudential Annuities Limited

PANL Prudential (AN) Limited

PFM Principles of Financial Management (for SAIF)

PGHK Prudential General Insurance Hong Kong Limited

PHKL Prudential Hong Kong Limited

PIA Prudential International Assurance plc

PPFM Principles and Practices of Financial Management

PRA Prudential Regulation Authority

RSR Required Smoothed Return (applicable to income Choice Annuity only)

SAA Scottish Amicable Account

SACF Scottish Amicable Capital Fund

SAIF Scottish Amicable Insurance Fund

SAL Scottish Amicable Life plc

SALAS Scottish Amicable Life Assurance Society

WPSF With-Profits Sub-Fund

Summary of Abbreviations

Appendix D


Glossary

Term/Phrase Definition

Accumulating with-profitsA form of with-profits fund where the investor buys units whose value increases in line with anydeclared regular bonuses and to which a final bonus may be added when the units are cashed in.

Aggregate asset share Total asset share for the specified product line.

Aggregate policy value Total policy value for the specified product line.

Appointed Actuary

Under the supervisory regime that existed prior to 1 January 2005, the Appointed Actuary roledescribed the actuary appointed by the company to provide advice to the company’s board.This is the (broadly) equivalent statutory actuarial role to the Actuarial Function Holder role inplace from 1 January 2005 to 31 December 2015 and the current Chief Actuary role. Outsidethe UK, a number of countries operate regimes with an Appointed Actuary role.

Asset shareThe premiums paid, less deductions for partial encashment of benefits, expenses, guarantees,tax and other charges, plus any allocations of miscellaneous profits accumulated at theinvestment return achieved on the relevant assets of the with-profits fund.

Benchmark (asset mix)The target fund investment position, typically expressed as the target percentages of the totalasset holdings to be invested in certain asset classes such as equities and fixed interest. Oftenused to measure fund performance or set investment limits.

Bonus yearBonus rates are calculated or applied according to a Bonus year rather than a calendar year – for most products the Bonus year runs from 1st April to 31st March (for PruBond products theBonus year runs from 1st March to 28th February).

Chief Actuary The Chief Actuary is a Fellow of the Institute and Faculty of Actuaries appointed by a company to provide certain actuarial advice to the company’s board, and fulfill various statutory dutiesunder the new regulatory reporting regime introduced on 1 January 2016.

Conventional with-profitsConventional with-profits contracts have a basic sum assured to which bonuses are added. The basic sum assured is the minimum amount paid out on a claim.

Core reserving basis The reserving basis set out in Schedule 4 of the ELAS scheme

Counterparty exposuresThe risk to each party of a contract that the counterparty will not live up to its contractualobligations.

Defined Charge ParticipatingBusiness with explicit defined charges that are invested in the 100:0 Defined Charge ParticipatingSub-Fund (DCPSF). This includes with-profits annuity business transferred from ELAS.

Divisible profits Profits arising that can be distributed to policyholders and, if applicable, shareholders.

Efficient portfolio managementThis is the construction of an asset portfolio so as to achieve the maximum expected return for a given level of risk.

Endowment assuranceA life assurance policy that pays out a lump sum after a specific period of time or on the earlierdeath of the policyholder. An endowment assurance can be used as a vehicle for saving or as away to repay a mortgage.



Equity backing ratioThe amount of real investments (for example equity, property etc) that are held, expressed as apercentage of total assets. The equity-backing ratio gives a measure of the exposure of theinsurance company to more volatile, return seeking, investments.

Final Bonus (also known asTerminal or Additional Bonus)

A bonus which may be applied on exit from the fund. Final bonus is not guaranteed and can beremoved at any time.

Individual GuidanceSpecific guidance from the regulator that applies to a particular individual or company, reflectingtheir particular circumstances, rather than general guidance relating to all (relevant) individualsor companies

Industrial Branch (IB) Business Business sold door-to-door by agents who collected the premium in cash. Generally whole of life or endowment plans. These products are no longer sold.

Inherited estate

An inherited estate is the amount of money in a with-profit fund in excess of the amounts that acompany expects to pay out to meet its obligations to existing policyholders. In respect of with-profits policyholders, these latter amounts are equal to the policyholders accumulated asset shares,plus any additional payments that may be required by way of smoothing or to meet guarantees.

Interim BonusA bonus added when maturity of a with-profits policy or death of the assured occurs betweennormal bonus declaration dates.

Investment ReturnThe return achieved (profits and losses) from an investment used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.

Longevity riskThe risk to which the company could be exposed as a result of customers living longer than expected.

Market Value Reduction (MVR)

When money is taken out of an accumulating/unitised with-profits policy, an adjustment may be made to the value of the withdrawal if the value of the underlying assets (asset share) is lessthan the value of the policyholder’s plan including bonuses (claim value). This adjustment isknown as a market value reduction.

Monitoring ActuaryA Fellow of the Institute and Faculty of Actuaries appointed in accordance with the SALAS scheme,to provide the Scottish Amicable Board with advice on all matters envisaged by the Scheme. TheMonitoring Actuary has full access to the management of the Scottish Amicable funds.

Mortality costsThe cost of providing life cover. The face amount of the policy multiplied by the probability thatit will have to be paid out as a claim on death.

Ordinary Branch (OB) BusinessBusiness for which premiums are paid by cheque, direct debit or other banking means and notwith a cash payment (as opposed to Industrial Branch business).

PAC Board of Directors

The Prudential Assurance Company Limited Board of Directors is the group of individualselected by its shareholders to represent them in overseeing management of the company. They are responsible for ensuring the company manages the With-Profits Funds in line with the Principles and Practices set out in this document.



Principles

The Principles define the overarching standards adopted in managing PAC’s with-profitsbusiness to maintain the long-term solvency of the fund for current and future policyholders and describe the approach used:

> in meeting our duty to with-profits policyholders, and

> in responding to longer-term changes in the business and economic environment.

Practices

The Practices describe the approach used:

> in managing PAC’s with-profits business, and

> in responding to changes in the business and economic environment in the shorter-term.

Regulatory SolvencyThe required minimum level of assets in excess of liabilities including any required regulatory buffer.

Reversionary/Regular bonus A bonus applied on a regular basis to the policy which, once added, cannot be removed.

Risk appetitePAC’s long term target position for the strength of its With-Profits Fund, underpinning its bonusand investment policy, which in conjunction with its available working capital, defines its abilityto take risk from time to time;

Risk capacity The financial ability to take on risk.

Risk level Measure of how much risk a firm has taken on.

Smoothed return Bonus rate declared for Income Choice Annuity business

SmoothingProcess used to dampen, insofar as possible, the impact of volatile experience (such as marketmovements) on claim values, with the aim that pay-out values progress smoothly from one yearto the next.

Sourcebook (COBS)A handbook setting out the FCA rules that apply to a firm with respect to 1) designatedinvestment business and 2) long-term insurance business in relation to life policies.

Surrender The early termination of an insurance product by the policyholder.

Unitised with-profits Another term for accumulating with-profits business, as defined above.

With-Profits Actuary (WPA)

Under the supervisory regime introduced on 1 January 2005, the WPA is appointed by acompany to review material relevant to the operation of the with-profits business, with thespecific duty to advise the company’s board on the reasonableness of how discretion has beenexercised in applying the PPFM and how any conflicting interests have been addressed.

With-Profits Committee (WPC)

A committee comprising at least three members, all of whom are independent of the company,which provides an independent assessment of the way in which the company manages its with-profits business and how the company balances the rights and interests of policyholdersand shareholders in relation to its With-Profits Fund.

With-Profits Fund

The With-Profits Fund is the fund where PAC’s with-profits business is written. This is dividedinto 3 sub-funds, the With-Profits Sub-Fund (WPSF), the Scottish Amicable Insurance Fund(SAIF) and the Defined Charge Participating Sub-Fund (DCPSF). With-Profits policyholders areeligible to participate in the profits of the With-Profits Fund through discretionary distributions.

Working capitalThe capital of a business which is used in its day-to-day trading operations. For a with-profitsfund, the working capital is also known as the inherited estate.

"Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies withinthe Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. Registered Office atLaurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised by the Prudential Regulation Authority and regulated by the Financial ConductAuthority and the Prudential Regulation Authority.

www.pru.co.uk

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