26th Feb 2008 09:00
Prudential PLC26 February 2008 For immediate release: Tuesday 26 February 2008 £2.7 BILLION ADDED TO POLICY VALUES IN ANOTHER YEAR OF STRONG PERFORMANCE FOR PRU'S WITH-PROFITS CUSTOMERS 59 Per Cent Increase In With-Profits Bond Sales In 2007 Performance Overview: • The Prudential Life Fund has delivered strong investment returns of 91 per cent over 5 years and 134 per cent over 10 years, with the Fund delivering a strong performance of 7.2 per cent in 2007 • £2.7 billion* added to Prudential UK With-Profits policy values (£2.5 billion in 2007) • Majority of annual bonus rates to increase in 2008 • Pensioners receiving a with-profits annuity income in retirement from Prudential** will benefit from a rise in income of up to 11 per cent (compares with an inflation rate of 3.1 per cent and State pension increase of 3.9 per cent) • All Prudential endowments to meet repayment targets in 2008, as they have done in all previous years • This strong long-term performance has led to total Retail with-profits sales in 2007 of approximately £2.3 billion, up 21 per cent on 2006. With-Profits bond sales increased 59 per cent in 2007, with sales in the fourth quarter up 89 per cent on the corresponding quarter of 2006 Notes: *£2.7 billion added to With-Profits policy values is split £1.2bn Annual Bonusand £1.5bn Terminal Bonus. *\* This does not include the book of with-profits annuities that transferred fromEquitable Life to Prudential on 31 December 2007 Gary Shaughnessy, Managing Director of Retail Life and Pensions at Prudentialsaid: "In these challenging markets, we have delivered once again - improving theretirement and savings prospects for millions of our customers. Over thelong-term, these inflation-beating returns clearly demonstrate the value ofinvesting in our actively, well managed fund, particularly in periods of marketvolatility, and the benefits that this style of more cautious investingprovides. Nowhere is this more apparent than for the pensioners who will receivemonthly income growth well above the cost of inflation and their State pensionincrease. "We are again number one among our major competitors in terms of Life Fundinvestment returns over 5 and 10 years and the value of our with-profitsinvestments continues to out-perform many of the other investments typicallyavailable to with-profits investors. With consumers in the UK seeking to protectthemselves from market down-turns, we have shown yet again that investing in astrong with-profits fund can produce good returns for the prudent investor. Wehave seen a surge in with-profits sales as more and more investors choosePrudential's with-profits to protect themselves during volatile and uncertainconditions as well as during market growth. "Successful risk management and asset allocation by the Prudential PortfolioManagement Group, our in-house fund managers, has been a key driver in helpingto protect the fund and lock in value to produce consistently strong returnsthat are in excess of most other with-profits funds, thereby delivering improvedprospects for our policyholders over the longer-term. They have made a number ofsignificant strategic calls over recent years including the decision to de-riskthe corporate bond portfolio within the fund prior to the market turbulenceexperienced since the middle of last year." Prudential's with-profits customers have benefited over the long-term from theWith-Profits Fund's performance, a consistent bonus setting philosophy andlong-term investment growth. This has allowed customers to plan for theirretirement with increased certainty and without having to experience the worstof stock market conditions. In 2007, the well diversified, multi-asset mix of Prudential's With-Profits Fundwas able to withstand the market pressures and produce a 7.2 per cent return. Italso out-performed all other major with-profits funds that have declared todate, as well as many other investment sectors (Cautious Managed, Balanced andFTSE All-Share (total return)). The Prudential With-Profits Fund continues tohelp protect its investors from the volatility seen in investment markets overthe last 12 months. Our investment performance stands out from our major with-profits competitorswith impressive one, five and ten year returns on the Fund. With-Profits Fund PerformanceCompany 2007 Total return over 5 Total return over 10 years yearsPrudential 7.2% 91.0% 134.4%Scottish Amicable 6.5% 86.4% 128.2%Liverpool Victoria 5.7% 78.7% 93.9%L&G 5.0% 77.4.% N/AStandard Life* 5.7% 69.8% 99.1%CGNU 5.4% 73.4.% 101.3%Norwich Union 5.8% 65.3% N/AScottish Widows 5.0% 61.4% N/AFriends Provident 5.0% 59.7% 80.4% *Note 6 Equally over 10 years, our Fund has outperformed the FTSE 100 and FTSE All-Shareindices, as well as the UK Average Cash benchmarks. Take a look at the facts: Fund / Index Total return over 10 yearsPrudential With-Profits Fund 134.4 %FTSE All Share (total return) 82.4 %FTSE 100 (total return) 69.2 %UK Average Cash Fund 38.2% Note 7 This message is a consistent and familiar one to Prudential policyholders whoare again rewarded for being part of the recognised top-ranking with-profitsfund in the UK over the last ten years, with strong investment growth over thatperiod. Prudential's with-profits customers can also plan for their retirement withgreater certainty in the knowledge that their investments have performedconsistently well over both the long-term, but also more recently in volatileand uncertain market conditions. The payouts to Prudential's with-profitscustomers compare very favourably against other actively managed investments. In 2007, Prudential's With-Profits Fund return of 7.2 per cent out-performed theaverage sector returns: • Balanced Managed Funds: 4.5 per cent; • Distribution Funds: 0 per cent; • IPD Property: 5.5 per cent; and • Cash: 3.8 per cent. Source: Financial Express average life fund sector fund performance andFinancial Express FINEX 90 day deposit performance, both between 31/12/2006-31/12/2007. Investment Property Databank 31/12/2006-31/12/2007 This performance demonstrates that investing in with-profits with Prudentialworks. Prudence Delivers for Customers: Prudential believes that its with-profits investments continue to provide solid,long-term growth prospects for most investors through increased payouts forpolicies maturing in 2008 when compared with their value 12 months ago - furtherevidence that holding long-term investments over their full term is sensible forthe vast majority of investors. As in previous years, Prudential continues to show the 12-month growth achievedfor individual policyholders, as this is a more relevant measure than showing acomparison with a policy that matured a year earlier. Policies in 2008 show increases compared with their position a year ago: • 10 year Prudence Bond - With-Profits Bond - (£10,000 single premium)up 6.0 per cent • 15 Year Prudence Bond - With-Profits Bond - (£10,000 single premium)up 7.7 per cent • 15 year Personal Pension - (£200 per month regular premiums) up 8.7 percent • 15 Year With-Profits Annuity - (i.e. taken out between 6 April 1993 and5 April 1994 with no anticipated bonus) will pay an income in 2008 up 10.1 percent • 20 year Personal Pension (£200 per month regular premiums) up 9.1 percent • 25 year Prudential With-Profits Mortgage Endowment up 5.9 per cent Notes: - Mortgage endowment example based on £50 p.m. regular premiums; maleaged 29 at start of contract - All figures are after deduction of tax (where relevant) and charges. As investor sentiment turns ever more cautious, the majority of Prudential'scustomers continue to benefit from year-on-year increases in their policyvalues, driven by fund management excellence, financial strength and adiversified mix of assets that has seen their investments compare veryfavourably to alternative available investments. Examples of annual bonuses include: Prudence Bond's performance relative to alternative investment productsInvestment Product Total Payout Annualised ReturnPrudential With-Profits Bond £17,361 5.6% (10 year, £10,000 single premium)Average building society account £11,879 1.7%Average balanced managed unit trust £15,655 4.6%Average balanced managed £14,429 3.7%unit-linked life fund Notes 5 and 8 Prudential's Personal Pension performance relative to alternative investmentproductsInvestment Product Total Payout Annualised returnPrudential With-Profits Individual Pension (20 year term, £117,469 8.2%£200 per month regular premiums)Average building society account £65,123 2.9%Average balanced managed unit trust £111,801 7.8%Average balanced managed £109,337 7.6%unit-linked pension fund Note 5, 8 and 9 Majority of annual bonus rates are increasing by around 0.25 per cent Annual Bonus Rates Per Cent 2008 2007 IncreasePrudential Prudence Bond 3.50 3.25 0.25 Personal Pension 3.50 3.25 0.25 Mortgage Endowment 1.20/2.50* 1.00/2.00* 0.20/0.50* Unitised Corporate Pensions 3.75 3.50 0.25 * per cent of sum assured/ per cent of previous annual bonus. Scottish Amicable With-Profits: Prudential's fund management team is also responsible for the running of theclosed Scottish Amicable with-profits fund. This fund accounts for £13.2billion of the £87 billion with-profits funds managed by Prudential. SincePrudential's acquisition of Scottish Amicable in 1997, the Fund has benefitedfrom the same investment process as the Prudential With-Profits Fund. This year's highlights are: • The Scottish Amicable fund delivered a solid investment return of 6.5per cent in 2007. Over 10 years the fund has delivered 128 per cent. • £676 million* added to Scottish Amicable With-Profits policy values • 25 year Scottish Amicable With-Profits Mortgage Endowment value up 8per cent • A typical payout on a 25-year Scottish Amicable endowment maturing in2008 is £49,280 • 98 per cent of Scottish Amicable endowments are expected to meetrepayments targets in 2008 *Notes: £676 million added to With-Profits policy values is split £216million Annual Bonus and £460 million Terminal Bonus. Mortgage endowment example based on £50 p.m. regular premiums; male aged 29 atstart of contract. All figures are after deduction of tax (where relevant) andcharges. Majority of annual bonus rates are increasing by around 0.25 per cent Annual Bonus Rates Per Cent 2008 2007 IncreaseScottish Amicable Personal Pension 0.60/1.40* 0.40/1.00* 0.20/0.40* Mortgage Endowment 1.10/2.00* 0.80/1.50* 0.30/0.50* * per cent of sum assured/ percent of previous annual bonus. Ned Cazalet, Cazalet Consulting, and a leading industry commentator, said: "ThePru's WP Fund has turned in a dazzling performance over the past few years. Onthe investment front, the Pru has got some big market calls right, and itstactical asset allocation decisions have paid-off, big time, leading to massiveinvestment out-performance relative to its peers, with the knock-on effectshowing up in its market-bucking bonus payments - we score it 9 out of 10."(Cazalet Consulting - October 2007) In July 2007 Prudential retained its top ranking in the WM Life Fund Survey. ThePrudential With-Profits Fund took the top spot, making it the best performingfund in the WM UK Life Fund Universe. The WM Life Fund Survey is compiled on aquarterly and annual basis by WM, the independent fund-performance serviceprovider. This ranking consolidates the superior position achieved in previousyears, with Prudential retaining its top spot over 10 years. Steve Johnson, of the Financial Times, wrote: "The Prudential fund, whichfamously avoided the worst effects of the dotcom crash by de-risking shortlybefore, was the best performing fund in the WM UK Life Fund universe in 2005 and2006. Prudential's with-profits fund, consistently the strongest performinglife fund in the UK, de-risked its portfolio prior to the current marketturbulence by hedging its credit exposure and selling down Asian equities and UKproperty." (Source: Financial Times FM - 13 August 2007) With-Profits Sales Boost: The strong long-term investment performance has led to total Retail with-profitssales in 2007 of approximately £2.3 billion, up 21 per cent on 2006.With-Profits bond sales increased 59 per cent in 2007, with sales in the fourth quarter up 89 per cent on the correspondingquarter of 2006. Sales of PruFund (Prudential's unitised and smoothed investment plan) inparticular were strong during 2007 at £190 million and it now has more than £300million of funds under management. PruFund includes an optional five yearcapital guarantee - this means that the value of a customer's investment on itsfifth anniversary is at least the amount initially invested in the plan,allowing for any income or withdrawals taken. This option is extremely popular,with over 60 per cent of new applications last year opting for it. -Ends- Full details of Prudential's 2008 bonus announcement can be downloaded from: www.pru.co.uk/presscentre www.headlinemoney.co.uk Or contact the Prudential UK press office on: Darragh Leeson Tel: 0207 150 2600 Mobile: 07801 856011Sophie Dawn Tel: 0207 150 2574 Mobile: 07810 753485Steve Colton Tel: 0207 150 3136 Mobile: 07771 531525 The information contained in Prudential UK's press releases is intended solelyfor journalists and should not be used by consumers to make financial decisions. Full consumer product information can be found at www.pru.co.uk Forward-Looking Statements This statement may contain certain "forward-looking statements" with respect tocertain of Prudential's plans and its current goals and expectations relating toits future financial condition, performance, results, strategy and objectives.Statements containing the words "believes", "intends", "expects", "plans", "seeks" and "anticipates", and words of similar meaning, are forward-looking. Bytheir nature, all forward-looking statements involve risk and uncertaintybecause they relate to future events and circumstances which are beyondPrudential's control including among other things, UK domestic and globaleconomic and business conditions, market related risks such as fluctuations ininterest rates and exchange rates, and the performance of financial marketsgenerally; the policies and actions of regulatory authorities, the impact ofcompetition, inflation, and deflation; experience in particular with regard tomortality and morbidity trends, lapse rates and policy renewal rates; thetiming, impact and other uncertainties of future acquisitions or combinationswithin relevant industries; and the impact of changes in capital, solvency oraccounting standards, and tax and other legislation and regulations in thejurisdictions in which Prudential and its affiliates operate. This may, forexample, result in changes to assumptions used for determining results ofoperations or re-estimations of reserves for future policy benefits. As aresult, Prudential's actual future financial condition, performance and resultsmay differ materially from the plans, goals, and expectations set forth inPrudential's forward-looking statements. Prudential undertakes no obligation toupdate the forward-looking statements contained in this statement or any otherforward-looking statements it may make. Contents 1. Investment Performance 2. What this means for customers • Payout values for Prudence Bond, personal pensions and savings endowments (Prudential and Scottish Amicable) • Comparison of with-profits to alternative investments 3. With-Profits Annuities (WPA) • Bonus rates for WPA • How WPA work 4. Mortgage Endowments - Prudential and Scottish Amicable • Payout values for mortgage endowments • Red, amber and green status 5. How bonus rates are managed by Prudential 6. How customers can get access to Prudential's with-profits performance 7. Annual and final bonus rates for 2007 • Annual and final bonus rates and how they are calculated • Who isn't seeing an increase • Unitised versus conventional policies 8. Notes to Editors 1. Investment performance Fund performance Prudential's Fund has once again performed strongly, with a total return of 7.2per cent (before tax and charges) in 2007. All investors will benefit. Over five years to 31 December 2007, the With-Profits Fund achieved a totalreturn of 91 per cent, against 94.6 per cent for the FTSE 100 (total return)and 104.6 per cent for the FTSE All-Share (total return). Over 10 years, theFund has returned 134.4 per cent against 69.2 per cent for the FTSE 100 (totalreturn) and 82.4 per cent for the FTSE All Share (total return). (All figures to 31 December 2007, before tax, charges and the effects ofsmoothing. Source: Prudential, Lipper Hindsight). How the fund is run and the role of Prudential's Portfolio Management Group Prudential has an exceptionally strong investment capability, with total fundsunder management of £267 billion (as at 31 January 2007) and more than 300investment professionals around the world. The geographic and sector portfolios within the With-Profits Fund (including theScottish Amicable With-Profits Fund) are run by different managers. Thisresource is co-ordinated by the Portfolio Management Group (PMG), which acts as'manager of managers' for the Prudential Group and is responsible for assetallocation and risk management. The PMG team is made up of economists, investment strategists and analysts whooperate separately from the conventional asset managers of Prudential. Theycome from a range of backgrounds and, between them, have extensive investmentknowledge and experience. Asset allocation With-profits contracts are long-term contracts. This, combined with the strongfinancial position of the fund, enables Prudential to invest with a clear biasto 'real assets' (e.g. equities and property). At the end of December 2007 theFund had approximately 69 per cent in real assets. These are the assets that inthe long run we believe will deliver the most attractive real returns. The fund is a very sophisticated, very well diversified multi-asset fund. It isdiversified geographically, by asset type and within the underlying stockportfolios. This diversification is an attractive feature of the Prudentialwith-profits proposition. It helps reduce risk or expected volatility byinsulating the total fund from potential weakness in any particular market orstock. It also gives our investment managers a large opportunity set from whichto find attractively priced assets. We believe that getting the broad investment strategy right is the mostimportant determinant of good long-term investment performance. We thereforehave a dedicated team of 16 investment professionals called the PortfolioManagement Group (PMG) focussed on getting the right asset allocation strategyfor our multi-asset funds including with-profits. This group has been extremelysuccessful over the last 10 years and we believe that our expertise in assetallocation is a core skill within the Prudential Group. For example, from 1999we started to switch a substantial part of the equity weighting into corporatebonds, which greatly mitigated the effect of the substantial stockmarket fallsduring 2000 - 2002. Other value adding decisions in recent years have been the bias towards smalleremerging markets within global equities, a significant investment in UKcommercial property - one of the best performing asset classes over the last 10years - the decision to be substantially invested in higher yielding corporatebonds rather than government bonds such as gilts, and the decision to hedge mostof the dollar exposures in the fund. The main theme for 2007 was one of de-risking the portfolio in a number ofselected areas. Firstly, early in the year the Fund continued to be an activeseller of UK commercial property. Our view was that the revaluation of propertyin recent years had gone too far, and that, particularly in retail sectors,there was evidence of excess. Towards the end of the year the market started toshow clear signs of the expected weakness and the fund is now not an activeseller at current levels. Secondly, we have de-risked in fixed income by substantially increasing theaverage credit rating on our bond portfolios - this culminated in the timelypurchases of a substantial derivatives hedge in June before the mayhem in creditmarkets. The Fund's exposure to the problem areas of higher risk structuredcredit such as US Sub-Prime is negligible. Thirdly, we have de-risked inequities by substantially reducing the bias within our global equity portfolioto the smaller emerging markets. This is essentially taking profits on theseinvestments after a 5 year period of very strong performance. The broad asset mix will continue to be actively managed and reviewed as theeconomic environment and market valuations change. Current Asset Mix 31/12/07 31/12/06 31/12/05 31/12/04 31/12/03 % % % % % Equity shares - UK shares 35 36 40 33 33 - Non-UK shares 17 17 19 15 15 Fixed interest 28 25 21 29 31 Property 14 15 15 18 17 Alternative investments 3 3 2 2 2 Cash 3 4 3 3 2 Total 100 100 100 100 100 Scottish Amicable Insurance 31/12/07 31/12/06 31/12/05Fund % % %(SAIF) Equity Shares - UK equities 33 35 37 - Non-UK equities 16 16 18 Fixed interest 33 32 27 Property 13 13 14 Alternative Investments 3 2 1 Cash 2 2 3 Total 100 100 100 Scottish Amicable's With-Profits Fund Prudential's asset management team is also responsible for the running of theclosed Scottish Amicable With-Profits Fund, which accounts for £13.2 billion ofthe £87 billion under management in Prudential's overall With-Profits fund.Since the takeover of Scottish Amicable by Prudential in 1997, the fund hasbenefited from the same investment process as the Prudential fund. The ScottishAmicable fund delivered an investment return of 6.5 per cent in 2007 and, overten years, the fund has delivered 128 per cent. Prudential's Solvency remains strong The long-term fund remains well-capitalised and is one of the strongest in theUK with a financial strength rating of AA+ by Standard & Poor's, Aa1 by Moody'sand AA+ by Fitch Ratings. 2. What this means for customers We have produced excellent year-on-year increases for most customers, asfollows: • 10-year Prudence Bond (£10,000 single premium): growth of 6% over the9-year value in 2007 (based on Optimum Return Fund, initial charge option) • With-profits annuities: income increased by up to 11% for the comingyear • 15-year personal pension (£200 per month regular premium): growth of8.7% (Prudential) and 9.3% (Scottish Amicable) over the 14-year value in 2007 How the investment performance relates to policyholders In translating the performance of the fund into benefits for policyholders,various allowances are made. First, for plans other than pensions, there is adeduction for tax and for all plans there are charges to take into account. Thereturn on the fund, net of tax, over 2007 was 6.5 per cent. There is then an allowance for smoothing. Some of the investment return in goodyears is held back so that we can boost bonus rates when markets have not beenso good - producing a generally smoother pattern of returns to policyholders,year to year, than the actual performance of the fund. Finally, the investment return is apportioned between annual bonuses and finalbonuses. In most cases, we aim to keep a substantial proportion of payout valuesin non-guaranteed form - that is, payable as final bonus. This helps to maintainflexibility for our investment strategy and to protect the ongoing solvency ofthe fund. Annual bonuses are based on our view of the expected long-term investmentreturn. Final bonus rates are more closely linked to actual past performance,taking into account smoothing, as described above. What is generally important to customers is the total value added to theirpolicy. The figures in the following sections reflect this, showing the value ofpolicies in 2008 compared with the value in 2007. Note: In recent years all of our policies have been re-branded 'Prudential' andare now sold under one brand. Historically, however, we operated two brands:Prudential and Scottish Amicable. For the purposes of this announcement we havemaintained the split so it is clear which example relates to which policies. Where we refer to a building society account it should be remembered that moneyin these accounts is secure and readily accessible and would generally returnall the investor's capital, whereas money in our investment products andpensions may return less than has been invested and the value of these productswill fluctuate. Payout values for Prudence Bond, personal pensions and savings endowments PRUDENTIAL: Typical increase in Prudence Bond policy values Prudence Bond Year-on-Year Increase in a Annual Increases With-Profits Bond Bond's Value # in Cash-in Values Policy Duration Single Premium Bond Value Bond Value Increase in Value over 2007 In 2008 (2007) 2008 2007 % 5 years £10,000 £14,850 £13,623 £1,227 9.0%(4 years) 7 years £10,000 £14,866 £13,982 £884 6.3%(6 years) 10 years £10,000 £17,361 £16,376 £985 6.0%(9 years) # No MVR is payable in this case Notes 5 and 8 Prudence Bond's performance relative to alternative investment products Investment Product Total Payout Annualised ReturnPrudential With-Profits Bond £17,361 5.6%(10 year, £10,000 single premium)Average building society account £11,879 1.7%Average balanced managed unit trust £15,655 4.6%Average balanced managed £14,429 3.7%unit-linked life fund Notes 5 and 8 What this means for the Typical Prudence Bond Customer A typical customer with a Prudence Bond policy will have seen its value increasefrom £10,000 to £17,361 over the ten years up to 1 May 2008. By investing withPrudential over the last 12 months, the policyholder's bond is worth 6.0 percent more than it was on 1 May 2007. This value represents an overall return of5.6 per cent over each of the last 10 years. Note: all figures are after tax and charges Prudential Personal Pension Personal pension* Year-on-Year Increase in a Annual Increase in cash-in value, after allowing for For policies maturing in 2008 Policy's Value premiums paid during the year Policy Duration Regular Policy Policy Value Increase in Value In 2007 (2006) Premium Value 2008 2007 over 2007 % 5 Years £200 p.m. £15,036 £11,549 £3,487 8.5%(4 years) 10 Years £200 p.m. £33,375 £28,462 £4,913 8.5%(9 years) 15 Years £200 p.m. £62,382 £55,112 £7,271 8.7%(14 years) 20 Years £200 p.m. £117,469 £105,367 £12,102 9.1%(19 years) *Note 8 Prudential's Personal Pension performance relative to alternative investmentproducts Investment Product Total Payout Annualised returnPrudential With-Profits Individual Pension £117,469 8.2% (20 year term, £200 per month regular premiums)Average building society account £65,123 2.9%Average balanced managed unit trust £111,801 7.8%Average balanced managed £109,337 7.6%unit-linked pension fund What this means for the typical Individual Pension Customer For a typical male personal pension customer, who has paid £200 per month intotheir pension for 20 years and is retiring at age 65, the fund is £117,469. Ifthe same customer had decided to transfer the policy last year, he would havelost out on the 9.1 per cent increase that he would have earned had he kept thepolicy for another year (after allowing for the premiums paid in the year). Note: all figures before tax but after charges Prudential Savings Endowments With-Profits Endowment Year-on-Year Increase in a Annual Increase in cash-in value, after 25 Year Policy (male 30 next Policy's Value allowing for premiums birthday at outset) paid during the year Policy Duration Regular Policy Policy Increase in ValueIn 2008 (2007) Premium Value Value over 2007 % Date 2008 Date 2007 10 years £50 p.m. £7,729 £6,829 £900 4.2%(9 years) 15 years £50 p.m. £13,467 £12,305 £1,162 4.5%(14 years) 20 years £50 p.m. £25,691 £23,910 £1,782 4.9%(19 years) 25 years £50 p.m. £46,686 £43,464 £3,222 6.0%(24 years) Note 8 Savings endowments performance relative to alternative investment products Investment Product Total Payout Annualised return With-Profits Endowment (25 Year Term, £50 per £46,686 8.1%month regular premiums; male aged 30 nextbirthday at outset)Average building society account £22,254 3.0%Average balanced managed unit trust £50,122 8.6%Average balanced managed £38,347 6.8% unit-linked life fund Notes 5 and 8 What this means for the typical with-profits endowment customer For a typical customer who has a 25-year with-profits policy, paying a premiumof £50 per month, the payout value on a policy maturing this year is £46,686,which reflects an 8.1 per cent return (net of tax and charges) for each of the25 years. Note: all figures after tax and charges SCOTTISH AMICABLE: Scottish Amicable Personal Year-on-Year Increase in a Annual Increase in cash-in value, Pension after allowing for premiums paid Policy's Value during the year Policy Duration Regular Policy Policy Value Increase in Value %In 2008 (2007) Premium Value Date 2007 over 2007 Date 2008 5 Years** £200 p.m. £15,780 £12,128 £3,652 9.3%(4 years) 10 Years** £200 p.m. £36,459 £30,761 £5,698 10.2%(9 years) 15 Years £200 p.m. £66,872 £58,841 £8,031 9.3%(14 years) 20 Years £200 p.m. £126,963 £114,633 £12,330 8.5%(19 years) ** Ex-SAL policy Note 8 Scottish Amicable's Personal Pension performance relative to alternativeinvestment products Investment Product Total Payout Annualised returnScottish Amicable With-Profits Individual Pension £126,963 8.8% (20 year term, £200 per month regular premiums)Average building society account £65,123 2.9%Average balanced managed unit trust £111,801 7.8%Average balanced managed £109,337 7.6%unit-linked pension fund Notes 5 and 8 All figures before tax, if applicable but after charges A male personal pension customer who has contributed £200 a month for 20 yearsand is retiring at age 65 on 1 May 2008 will have a fund value of £126,963. Overthe last year, the total value of his pension will have grown by 8.5%, allowingfor the premiums paid during the year. 3. With-Profits Annuities Key points: • With-profits annuities income increased by up to 11 per cent for thecoming year • Five-year overall average bonus up to 9.23 per cent (from 8.2 per cent) • Regular Bonus 2.75 percent for the fifth year running • As a result, all with-profits annuitants, regardless of theirAnticipated Bonus Rate, will receive an increase in income at their annualreview in 2008/9 With-Profits Annuities (WPA) WPAs are invested in the with-profits fund and promise to pay retirees an incomefor the rest of their lives. Crucially, WPA generates an income stream that hasthe potential to grow. By contrast, a fixed-level annuity will not rise, so aretiree will find that the value of their annuity is gradually reduced byinflation. WPA can also provide an attractive alternative to conventional annuities thatare linked to inflation. Although incomes from inflation-linked annuities areguaranteed to rise in line with the Retail Price Index, the starting incomes areusually considerably lower. How With-Profits Annuities work Conventional annuity payments have been in general decline due to, among otherthings, lower bond yields and companies taking into account the fact that peopleare living longer. While conventional annuities are essentially risk-free,savers who are considering a conventional annuity now will be locking themselvesinto these relatively low rates. WPAs, on the other hand, link the level of income to the performance of thewith-profits fund, which has a mix of assets that over the longer term givesthem the prospect of income growth. The returns from these investments are paidto annuitants as bonuses, which may vary from year-to-year. Bonuses are designedto smooth the ups and downs of the investment markets. An important factor is the anticipated bonus rate (ABR) that policyholderschoose at the outset. This determines the starting income and is used tocalculate how much the income goes up or down when bonuses are added each year.If the actual bonuses awarded are higher than the ABR, the annuity payments inthe next year will increase. If they are lower, the annuity income will drop. Our experience shows that many people opt for a middle range ABR that canprovide a similar starting income to a conventional level annuity. Currently anABR of around 3.5 per cent will achieve this for most retirees. This makesfuture income growth with a WPA more likely because it's a reasonably lowperformance to beat. By way of an example, a 65-year old man could have bought three types of annuitywhen he invested £50,000 on 6 April 2004. Product Starting income Income paid in Increase in income Total income in Extra income over 2004/05 2008/09 over 2004 five years since level annuity 2004 after 5 years Pru WPA (ABR 3%) £3,648 £4,625 £977 £20,550 10% Level £3,729 £3,729 - £18,645 N/A RPI Linked £2,556 £2,944 £388 £13,652 -27% Note: 1. The amount of the additional bonus is not guaranteed and it may vary orbe discontinued at any time. However, once added it will remain unchanged untilthe next yearly review. 2. The anticipated bonus rate (ABR) determines the starting income and isused to calculate how much the income goes up or down when bonuses are addedeach year. If the actual bonuses awarded are higher than the ABR, the annuitypayments in the next year will increase. If they are lower, the annuity incomewill drop. 4. Mortgage Endowments Key points: All Prudential and an estimated 98.2 per cent of Scottish Amicable endowmentsmaturing in 2008 are forecast to meet repayment targets • We expect 14,694 Prudential policies to mature in 2008, and the averagesurplus is expected to be £5,500. • We expect 33,300 Scottish Amicable policies to mature in 2008. Ofthese, an estimated 98.2 per cent will meet repayment targets, with the averagesurplus expected to be £2,280. Of the 580 (1.8 per cent) which are notanticipated to meet their target amount, the average shortfall is expected to bearound £362. And compared to 2007... • All Prudential endowments maturing in 2007 met their repayment targets- the average surplus on policies was £4,300. • 98 per cent of Scottish Amicable endowment policies maturing in 2007met their repayment target with an average surplus of £3,348. The remaining 2per cent (470 policies) had an average shortfall of £518. Payout values for mortgage endowment customers: Prudential Prudential With-Profits Mortgage Year-on-Year Increase in a Annual Increase in Endowment cash-in values, after Policy's Value allowing for premiums 25 Year Policy (male, 30 next paid during the year birthday at outset) Policy Duration Regular Policy Policy Increase in Value In 2008 (2007) Premium Value Value over 2007 % Date 2008 Date 2007 10 years £50 p.m. £7,550 £6,670 £880 4.0%(9 years) 15 years £50 p.m. £12,950 £11,833 £1,117 4.3%(14 years) 20 years £50 p.m. £24,848 £23,125 £1,723 4.8%(19 years) 25 years £50 p.m. £44,515 £41,444 £3,072 5.9%(24 years) Note 8 Prudential mortgage endowments performance relative to alternative investmentproducts Total Payout Annualised returnPrudential With-Profits Endowment (25 Year Term, £44,515 7.8%£50 per month regular premiums; male aged 30next birthday at outset)Average building society account £22,254 3.0%Average balanced managed unit trust £50,122 8.6%Average balanced managed £38,347 6.8% unit-linked life fund Notes 5 and 8 What this means for the typical Prudential mortgage endowment customer For a typical customer who holds a 25-year with-profits endowment paying apremium of £50 per month, the payout value on maturity is £44,515, which isequivalent to 7.8 per cent return (net of tax and charges) for each of the 25years. Note: all figures after tax and charges Scottish Amicable Scottish Amicable With-Profits Year-on-Year Increase in a Annual Increase in Mortgage Endowment cash-in values, after Policy's Value allowing for premiums 25 Year Policy (male 30 next paid during the year birthday at outset) Policy Duration Regular Policy Policy Increase in Valuein 2008 (2007) Premium Value Value over 2007 % Date 2008 Date 2007 10 years £50 p.m. £6,850 £5,823 £1,027 6.9%(9 years) 15 years £50 p.m. £14,155 £12,633 £1,522 7.1%(14 years) 20 years £50 p.m. £25,603 £23,280 £2,323 7.3%(19 years) 25 years £50 p.m. £46,274 £42,252 £4,022 8.0%(24 years) Note 8 Scottish Amicable's mortgage endowment performance relative to alternativeinvestment products Total Payout Annualised return Scottish Amicable With-Profits Endowment (25 £46,274 8.0%Year Term, £50 per month regular premiums; maleaged 30 next birthday at outset)Average building society account £22,254 3.0%Average balanced managed unit trust £50,122 8.6%Average balanced managed £38,347 6.8%Unit-linked life fund Notes 5 and 8 Note: all figures after tax and charges What this means for the typical Scottish Amicable mortgage endowment customer For a typical customer who holds a 25-year with-profits endowment paying apremium of £50 per month, the payout value on maturity is £46,274, which isequivalent to 8.0 per cent return (net of tax and charges) for each of the 25years. Note: all figures after tax and charges Red, Amber and Green mortgage endowment status In accordance with accepted guidelines we monitor how many of our endowmentcustomers' policies are not expected to meet their repayment targets. This isshown as 'red, amber, or green', with green being satisfactory, amber indicatinga potential shortfall and red showing a likely shortfall: action should betaken. Prudential Prudential has approximately 185,000 mortgage endowment policies in force. • 12,000 policies matured in 2003, all of which met their target values. • 9,271 policies matured in 2004, all of which met their target values(the average surplus was £1,900). • 8,333 policies matured in 2005, all of which met their target values(the average surplus was £2,200). • 9,923 policies matured in 2006, all of which met target values (theaverage surplus was £3,350). • 10,923 policies matured in 2007, all of which met target values (theaverage surplus was £4,300). • We expect 14,694 policies to mature in 2008, all of which areanticipated to meet repayment targets. The expected average surplus is £5,500. Approximately 136,000 mortgage endowment letters were issued to Prudentialpolicyholders in 2007 (where a customer has more than one mortgage endowmentpolicy with Prudential, only one letter is sent) of which: 2008 2007 2006 2005 2004 2003 Green 65% 67% 60% 51% 41% 24%Amber 16% 17% 27% 24% 29% 32% 81% 84% 87% 75% 70% 56% Red 19% 16% 13% 25% 30% 44% Note: The primary reason for the decrease in the green percentage is thereduction of the proportion of green policies overall. Scottish Amicable Scottish Amicable had approximately 425,000 plans in force (as at November2007). • 19,000 Scottish Amicable mortgage endowments matured in 2003, of which2,700 did not meet their target amount (the average shortfall was £595). • 19,356 endowment policies matured in 2004 of which 17,238 (89 per cent)met their repayment targets, the average surplus being £2,900. Of the 2,118 (11per cent) that did not meet their target amount there was an average shortfallof £890. • 16,774 endowment policies matured in 2005 of which 15,959 (95 per cent)met their repayment targets, the average surplus being £2,409. Of the 815 thatdid not meet their target amount there was an average shortfall of £49. • 20,966 endowment policies matured in 2006 of which 20,030 (95.5 percent) met their repayment targets, the average surplus being £2,746. Of the 936that did not meet their target amount there was an average shortfall of £894. • 22,200 endowment policies matured in 2007 of which 21,354 (96 per cent)met their repayment targets, the average surplus being £3,342. Of the 845 thatdid not meet their target amount there was an average shortfall of £923. Of the22,200 endowment policies that matured in 2007, 21,532 were 100 per centwith-profits plans. 21,062 (98 per cent) met their repayment targets, theaverage surplus being £3,348. Of the 470 that did not meet their target amountthere was an average shortfall of £518. • We expect 33,300 policies to mature in 2008 with an average surplus of£2,280. Of the 580 (1.8 per cent) policies which are not anticipated to meettheir target amount, the average shortfall is expected to be around £362. Note: The expected shortfall is based on a representative sample of policies anddepending on which policies actually mature, the actual shortfall may turn outto be different. For example, in February 2005 we estimated the averageshortfall to be around £1,000 for policies maturing during 2005, whereas theactual shortfall was only £49. Around 260, 000 endowment letters were issued to Scottish Amicable policyholdersin 2007, of which: 2008* 2007 2006 2005 2004 2003 Green 50% 47% 41% 24% 16% 13% Amber 35% 35% 43% 42% 31% 22% 85% 82% 84% 66% 47% 35% Red 15% 18% 16% 34% 53% 65% * the figures for 2008 are estimates 5. How bonus rates are managed by Prudential In 2008 annual bonus rates are being maintained or increased on all policies.When we decide on the rate of the annual bonus, the main consideration is thereturn we expect our investments to earn in the future. We hold some of thisreturn back to enable us to pay final bonuses and maintain a flexible investmentstrategy. We target annual bonuses to be a prudent proportion of the expected long-termfuture investment return (net of tax where relevant, and charges), and we aim tochange the annual bonus rates only gradually. For the with-profits fund ourexpected long-term future investment return is around 8.5 per cent per annumgross. So, annual bonuses look forward and final bonuses look back. Therefore, it'sthe final bonus that takes into account the actual investment return over theterm of the policy and it's this element of the overall return that is mostlikely to change year-on-year. 6. How customers can get access to Prudential's with-profits performance Access to the with-profits fund is available through a range of Prudential'sinvestment products. These include: Prudence Bond: An investment bond that is designed to give the client a smoothed return basedon the performance of the with-profits fund. It is available via the PrudentialInvestment Plan. PruFund Investment Plan: An investment bond that is designed to give the client a smoothed return basedon the performance of the with-profits fund. It differs from Prudence Bond inthat returns are smoothed according to a tested formula. Typically, PruFund'spolicyholder returns will more closely reflect the performance of thewith-profits fund over shorter terms. Over the medium to long-term, returns onPruFund and Prudence Bond are expected to be similar. Policyholder returns arenot subject to any MVR throughout the term of investment. PruFund also adds aquarterly return which is estimated in advance, currently 5 per cent net of lifefund tax and product charges. With-Profits Annuity: An annuity that provides income based on both actuarial calculations and theperformance of the with-profits fund. In the current market place, under normalinvestment conditions, income from a with-profits annuity is expected to begreater than a conventional or inflation-linked annuity would provide. International With-Profits Bonds: Available in Sterling, US Dollar and Euro denominations. Bonus rates are notsubject to the deduction of life fund tax and are therefore quoted on a grossbasis. The returns and the assets supporting those returns are based in thecurrency of the relevant fund (that is, Sterling, US Dollars and Euros). Individual Pension Plans: A with-profits pension plan that is designed to give smoothed access to thereturns of the life fund, without deduction of life fund tax (other taxes mayapply). Trustee Investment Plan (TIP): A single premium plan aimed at Trustees of Pension Funds. Returns are paidgross of tax and net of charges. Prudential also offers a 'no MVR Guarantee' atthe end of 5 years. TIP can be used as a core holding to a growth portfolio forthe medium term (5 years or more) and it can also reduce the need for Trusteesto actively make investment decisions as these are taken by Prudential. Thisfund cannot lose money at maturity. Regular bonuses once added cannot be takenaway and this, coupled with the 'no MVR guarantee' at maturity, provides anexcellent proposition for Trustees. Note: 1. The value of an investment may fluctuate and is not guaranteed. An MVRmay be applied. You may not get back the full amount of your investment and, forinvestments in the With-Profits Funds as above, the value of the policy dependson how much profit the fund makes and how Prudential decides to distribute it. 2. With regard to the Expected Growth Rate for PruFund, this rate is anindication of how we expect the PruFund Growth fund to grow over the year andassumes no regular withdrawals are taken. The Expected Growth Rates for thefunds can be found on www.pru.co.uk, these are reviewed at the end of eachquarter and are not guaranteed. 7. Annual and final bonus rates for 2008 Total bonus rates (which is the combination of annual and final bonus rates)were increased or maintained on all unitised plans and there were excellentyear-on-year increases in the value of nearly all with-profits policies. Prudential takes a prudent, but active approach to fund management, smoothingand bonus rates. It is this approach that has allowed us to continue to paybonuses and provide policyholders with competitive returns over recent years,despite difficult market conditions. Prudential will pay two types of bonuses this year: • Annual (or regular) bonuses are added to policies each year in order togradually increase the plan value (excluding MVR, or cash-in charges). When we decide on the rate of the annual bonus, the main thing we consider isthe return we expect our investments to earn in the future. We hold some ofthis return back to enable us to pay final bonuses and maintain a flexibleinvestment strategy. We target annual bonuses to be a prudent proportion of the expected long-termfuture investment return (net of tax and charges), and we aim to change theannual bonus rates only gradually. For the with-profits fund our expected long-term future investment return isaround 8.5 per cent p.a. gross. Annual bonus rates are being maintained or increased on all policies. • Final (or terminal) bonuses may be added when the benefits of a policymature, are cashed-in/transferred or the policyholder dies. These bonuses are used to make up the difference between the guaranteed benefits(annual bonuses) and the overall smoothed value of each customer's policy assetshares. Prudential uses these bonuses to return to each policyholder a fair share of theassets of the with-profits fund, while smoothing for the impact of marketchanges, especially around the date of maturity. Payment of a final bonus is notguaranteed. So, in summary, annual bonuses look forward and final bonuses look back.Therefore, it's the final bonus that takes into account the actual investmentreturn over the term of the policy, and it's this element of the overall returnthat is most likely to change year-on-year. Examples of bonus rates Product Regular/Annual New Money Rate % Bonus Rate %Prudence Bond 2008 2007 Change 2008 2007 ChangePrudence Bond (Optimum Return) 3.50 3.25 0.25 5.2 5.2 0.00PensionPru Personal Pensions 3.50 3.25 0.25 6.75 6.75 0.00Mortgage Endowments 1.20/2.50* 1.00/ 0.20/ N/A N/A N/A 2.00* 0.50*Retirement IncomeWith-Profits Annuities 2.75 2.75 0.00 N/A N/A N/A *-% sum assured / % of attaching regular bonus Full details of all annual bonus rates are available on request. So who isn't getting an increase? Estimates are that around 1000 policyholders may not see an increase in theirpolicy values. The issue for them is not that they won't see their annual bonus maintained orincreased - they will - but rather it is either the impact of charges in theearly years on a long-term policy or because they are already being paid morethan the underlying value of assets. Unitised policies versus conventional policies While there are many variations of with-profits policies and plans, they can begrouped into two areas: unitised policies and conventional policies. Unitised with-profits policies Where money is invested in a unitised policy - such as our Prudence Bond orPersonal Pension plan - units are allocated to policyholders, and these unitsincrease at a steady rate, determined by the annual bonus rate. At retirement orwhen the policy is cashed-in, a final bonus may be added. An MVR may apply whena policy is cashed-in or transferred. Since these policies are with-profits, they benefit from the smoothing process.This is different to a unit-linked policy where the value of the units goes upor down in line with market movements. Conventional policies Conventional with-profits policies - such as mortgage endowments - have aninitial amount that is guaranteed to be payable to the policyholder on maturity,known as the sum assured. Each year the guaranteed amount can be increased bythe annual bonus. At maturity a final bonus may also be added. 8. Notes to Editors: 1. Comparison between Prudential products and other returns are for periods to 1May 2008 2. The deposit fund values, unit trust values and unit-linked life fund valuesin 2007 use actual returns from the relevant 1 May to 31 December 2007 and thenprojected to 1 May 2008 using the most recent returns. 3. The Micropal UK Savings Indices deposit rates assumed are gross of tax forpensions products and net of tax for life products (net of tax, for PrudenceBond). The rates are surveyed from the largest 20 building societies andex-societies. The UK Savings £2,500+ Investment gross/net index for deposits of£2,500+ at 7 day notice or better have been used for all regular premiumpolicies and for single premium policies of less than £25,000. The UK Savings£25,000+ Investment gross/net category with 90 days notice or better has beenused for all single premiums greater or equal to £25,000. The unit trust returnsare based on an average for the "Balanced Managed" sector, offer to bid, grossincome reinvested (net income reinvested, for Prudence Bond). The unit-linkedlife fund returns are based on the average returns in the ABI UK Life Fund's "Balanced Managed - Life Fund" category. 4. Source for stock market returns: M&G. 5. The with-profits investment is not like a bank or building society depositaccount. A with-profits policy may return less than has been invested, inparticular in the early years, whereas a bank or building society depositaccount would return all the customer's capital. Investors should considerkeeping any money which might be needed in the short term in a bank or buildingsociety deposit account which is generally secure and readily accessible. 6. Standard Life returns are for years of 15.11.x to 14.11.x+1 rather thancalendar years up to, and including, 2003. Calendar years used thereafter. For2006 and 2007 the With-Profits Bond return has been used. 7. Source: Prudential / Lipper Hindsight. All figures to 31 December 2007 beforetax, charges and the effects of the smoothing process. Past performance is noguide to the future. 8. All policy values include final bonus. Details of these final bonus figuresare available upon request. 9. The purpose of illustrating the performance of pension funds against BuildingSociety accounts is to compare and contrast the values built up by investing inthese products, both of which have their own specific risks and benefits. 10. MVR policy is subject to change without notice. 11. Past performance is no guide to the future. The payment of a final bonus isnot guaranteed. Future rates of bonus are not guaranteed. 12. Full terms and conditions are available on request. 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