With-profits policy performance – your questions answered
January 2015
This leaflet aims to answer questions that are often asked about the performance of with-profits
investment bond policies like yours, which are invested in the National Provident Life Limited WithProfits Fund (the ‘fund’). The leaflet only applies to bonds (policies) which were issued before 1 January
2000 and increments issued to these bonds after this date. It does not apply to the with-profits element of
Portfolio Bonds issued in the second half of 1999 or later.
If you have made more than one investment into your bond, the information in this leaflet applies
separately to each investment as if it was a stand-alone bond which commenced on the day the
investment was made.
1 How does my with-profits policy work?
We have produced a guide to explain this. It is called ‘How We Manage the National Provident Life
Limited With-Profits Fund’. We refer to this as ‘the Guide’. You can obtain a copy of the guide here or you
can ask us for a copy.
We recommend that you read the Guide before reading the rest of this leaflet, as it will help you
understand some of the terms we use.
2
How do you work out my bonus rates?
We answer this question in the Guide. However, you may find the following explanation helpful.
We aim to add bonuses to your policy so that
its value reflects the profits we have made
whilst investing your money, less an allowance
for the costs of selling and running the policy.
We can do this by adding annual bonuses,
which increase the price of your units daily, or
by adding a final bonus, which increases the
value of your units when your policy pays out.
When investment markets fall we can make
losses rather than profits. If we paid out all of
our profits as an annual bonus as soon as we
earned them, there would almost certainly be
times when we have added more in annual
bonuses than we had earned on our
investments. So we aim to add annual
bonuses at a lower rate than the actual returns
received, to make it less likely that the value of
your units will be more than the growth of your
original investment during the life of your
policy.
If your original investment has grown to more than the value of your units when it is cashed in
(surrendered), we will add a final bonus to your payout. Figure 1 shows this.
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Why are annual bonus rates zero and when might you increase them?
Annual bonus rates have been zero in recent
years because, for most policies, the value of
units has increased by more than the
investment returns and other profits which we
have earned after allowing for our expenses.
The exception is for bonds invested in the
Series 1 Unitised With-Profits (UWP) Fund,
which have a minimum annual bonus rate of
3% each year.
Figure 2, which may be compared with
Figure 1, shows the actual progress of the
original investment for a policy which started
on 1 January 1996.
You can see that the value of the investment is currently less than the value of units.
As this is also the case for policies issued on most other dates, we do not expect to be able to increase
annual bonus rates for a number of years. However, for policies where the growth of the original
investment is larger than the current value of units we will normally add a final bonus to your payout.
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Why have returns been lower than expected?
The main source of profit for with-profits policies is investment performance. From around 2000, the withprofits fund’s investments have not performed as well as they have historically. This remains the main
reason for the low payouts and low or nil annual bonus rates.
Investment returns experienced by the with-profits fund in 2001 and 2002 were negative as a result of
poor stock market performance, which resulted in poor investment returns on equities (company shares).
Since 2003, we have invested less in equities and have invested more in fixed interest securities (bonds
or loans issued by governments or companies). We did this to protect policyholders as the investment
return on fixed interest securities is generally more stable than that on equities and property. This
continues to be the case.
Although investment returns on equities were generally better between 2003 and 2007, the with-profits
fund was no longer invested in equities and did not benefit from these gains.
We can pay bonuses only if our total profits allow. The profits do not just come from our investments but
reflect the profits (and losses) of all of the policies in the with-profits fund. For example, we have had to
set money aside in the past to pay the guaranteed basic sums and past annual bonuses which were, with
hindsight, not always justified by the profits being earned. We have also had to set money aside to pay
pensions for longer than expected as our pensioner policyholders are living longer than originally
expected. All this has reduced our overall profits, and our ability to pay annual bonuses.
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5
What is a market value reduction (MVR) and how do you calculate it?
There may be times when, looking back, we have not earned as much over a period as we needed to be
able to add annual bonuses at the rates we did. This is currently the case for many policies.
For such policies, we will usually reduce the
amount we would pay if the policy was
surrendered (cashed in) so that we only pay
out the current value of the original
investment.
It would be unfair to the policyholders
remaining in the with-profits fund if we paid
some policyholders more than we had earned,
as this would mean that other policyholders
receive less than was due to them.
This reduction is called a market value
reduction (MVR) or market value adjustment
(MVA) because it is usually applied when the
value of the original investment is lower than
the current value of units. It is shown by the
arrow in Figure 3.
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When does an MVR not apply?
MVRs do not apply when a policy pays out on the policyholder’s death, or to regular withdrawals up to
certain limits where you surrender (cash in) an agreed quantity of your units at fixed intervals to provide
you with an income.
Some bonds also had an MVR-free date on their 10th policy anniversary. However, these anniversaries
have now all passed.
7
If I keep my policy going, can I expect the MVR to get less?
The size of future MVRs (or final bonuses) will vary depending on the profits of the with-profits fund.
Keeping annual bonuses at zero should mean that the MVRs reduce over time. However any periods of
poor investment performance will result in an increase to MVRs to ensure the fair treatment of all withprofits policyholders.
8
Will I get any final bonus when my policy pays out?
As we explain in the Guide, we aim to pay you a fair share of the profits the relevant with-profits fund has
earned over the time you have had your policy. If this fair share allows us to pay more than the value of
your units, a final bonus will normally be added when your policy pays out. The example in question 2
may help you to understand this.
Currently very few policies are receiving a final bonus. Whether or not you will receive a final bonus
depends on when you took your policy out and when it is surrendered (cashed in) and the investment
performance over this period.
9
Should I keep my policy going or stop it now?
You can surrender (cash in) your policy at any time.
Some things you may want to take into account when considering whether to surrender (cash in) your
policy include:
 whether you could earn a better return on the proceeds if you invest them elsewhere; and
 whether surrendering your policy would help you repay expensive borrowings.
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We recommend that you speak with your financial adviser before surrendering your policy. If you do not
have a financial adviser, you can find details of the advisers in your area at www.unbiased.co.uk. Please
note that financial advisers may charge you for providing advice.
10
What is my policy invested in?
Your policy invests in the fund, which in turn invests in a range of assets with the aim of meeting all the
guaranteed benefits over the medium to long term.
For Series 1 bonds, which have a minimum annual bonus rate of 3% each year, we invest your premiums
mainly in fixed interest securities and also some cash. As at 1 January 2015, policies are invested 95% in
fixed interest stocks and 5% in cash deposits.
For bonds invested in Series 2 to 7, which do not have a minimum annual bonus rate, we invest your
premiums in more higher risk investments which, over the long term, offer the potential for better returns
than lower risk investments over the longer term. As at 1 January 2015, policies are invested 57% in
company shares and property and 43% in fixed interest stocks and cash deposits.
The fund may use derivatives (for example, the right to buy or sell securities at a pre-agreed price on a
specific date) as an efficient way of quickly changing the investments in the fund and/or to reduce risks.
We review our investment strategy regularly as market conditions can change quickly. The fund’s main
investment objective, apart from maximising return where possible, is to protect the security of
policyholders’ existing contractual benefits, and provide stability.
11
How does this investment strategy compare with other companies’ with-profits funds?
Other with-profits funds invest largely in the same types of investments as we do, but may have more
exposure to higher risk investments such as company shares (equities) and property (land & buildings)
which are expected to provide a higher return in the medium to long term.
The way a with-profits fund is invested will depend on a number of factors, including the current financial
position of the fund and the company’s view of the prospects for each type of investment.
With-profits funds with large amounts of excess money, over the amount needed to pay out guaranteed
benefits to current policyholders, can hold more assets which may fall in value, as they can make up any
falls using the excess money. We do not have any excess money in our with-profits fund and it is likely
that the fund will have to call on shareholder monies currently in the with-profits fund to meet some
guaranteed policy payments.
12
What return has been earned on the investments underlying policies in the past? What do
you expect to earn in the future?
Figure 4 shows the returns earned after tax
each year since 2008 for a with-profits bond
issued on 1 January 1996.
No one can say with certainty in advance
which types of investments will do better than
others. Our view is that the future will be one
of continuing low inflation and low investment
returns.
It is generally thought unlikely that the high
return on equities (company shares) seen in
the 1990s will be repeated.
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13
You are now holding no equities in Series I bonds whereas a large proportion of the fund was
in equities in the past. Why is this?
For Series 1 bonds the amounts already guaranteed to be paid are very high compared to the underlying
policy values. Reducing the proportion of equities held in the with-profits fund has helped ensure that the
fund will be able to continue to pay these guaranteed amounts. This is because higher risk investments
are likely to move up and down in value to a greater extent than lower risk assets, particularly over the
shorter term.
14
I have been drawing a regular income from my policy since it started. Why has the value of
my policy reduced so much?
The profits earned by the with-profits fund have not been sufficient to enable us to add enough annual
bonuses to make up for the amounts withdrawn from your policy. See also question 3.
If you want to preserve more of your capital, you could consider reducing the amount of income you
withdraw. However, some regular income withdrawals can be MVR free (see question 5) so you should
check your policy’s terms and conditions.
15
What does Phoenix Group get from my policy?
National Provident Life Limited is one of the life companies within the Phoenix Group of companies
(Phoenix Group). However, the fund is run as if it were still a mutual company owned by its policyholders,
and the shareholders are only entitled to profits arising on business written since 1 January 2000 and
payments for loans made to the company.
Our policies are administered by other companies within the Phoenix Group. If these companies carry out
their responsibilities for less than the fees we pay them, this could result in profit for Phoenix Group.
Phoenix Group pays its own directors and shareholders out of its profits from all sources, of which the
payments described above form only a small part.
16
Would I have been better off investing in a bank or building society account?
Whenever you have some money to invest, you have to decide on the most suitable method for your
needs; for example a bank or building society account or a stock market investment. You might choose to
invest your money in a safe but steady way or in a way which offers the possibility of a higher return but
with a chance that it would not perform so well or even lose you money.
No one can say with certainty in advance which types of investments will do better than others. Most of
our with-profits bonds have unfortunately not done as well as investing in the average building society
account.
17
How do I obtain further information?
Versions of this leaflet may be available for other types of with-profits policy and for the policies of other
life companies within the group.
If this leaflet has not answered your questions we will be happy to help you further. Please contact us
here.
You can also find the latest information such as final bonus rates and how these are calculated, how the
fund is invested and investment returns here.
The information in this leaflet is correct as at 1 January 2015.
QA_NPLL_Bonds_2015
Phoenix Life Limited No.1016269, Phoenix Life Assurance Limited No.1419 and National Provident Life Limited No. 3641947 are authorised by the Prudential
Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. All companies are registered in England and have their
registered office at: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG.
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