20th Feb 2007 07:01
Prudential PLC20 February 2007 Embargo: 07.00am Tuesday 20 February 2007 ANOTHER EXCELLENT YEAR FOR PRUDENTIAL'S 4.4 MILLION WITH-PROFITS CUSTOMERS Overview: • Prudential's 4.4m with-profits customers continue to reap the rewards of investing over the long-term in the Prudential With-Profits Fund ("the Fund") • Consistent and prudent investment management approach resulting in strong returns in Prudential's Fund over many years • Excellent returns that help customers plan for their retirement with greater certainty: - Prudential has increased year-on-year payouts by more than 10 per cent across the majority of policies - Annual bonus rates maintained in 2007 - With-profits payout values boosted by up to 17.5 per cent - With-Profits Annuities income increased by up to 15 per cent for the coming year - All maturing Prudential endowments will meet repayment targets in 2007 and an estimated 96 per cent of Scottish Amicable endowments are expected to do the same • £2.5 billion added to policy values Prudential's Investment Performance Excels in 2006: • Prudential's Life Fund generates 12.4 per cent return in 2006. Investment performance over 5 years of 63.8 per cent and over 10 years of 161.9 per cent, out-performing the funds of our major competitors who have declared to date in 2007 • Significantly better returns in 2006 from Prudential's Fund compared with the average sector returns of: Balanced Managed Funds; Distribution Funds; and Cautious Managed Funds • Prudential's with-profits products have also significantly out-performed against cash and building society accounts • Prudential's investment management has provided "dazzling performance over the past few years" (Source: Cazalet Consulting) Gary Shaughnessy, Managing Director, Life and Pensions at Prudential, said: "Byprudently managing our With-Profits Fund, we have consistently deliveredsubstantially better returns than the vast majority of bank and buildingsociety accounts while at the same time limiting the risk customers face wheninvesting directly in the stock market. Another year of strong returns meansthat yet again, our policyholders are benefiting from investing with Prudentialover the long-term." What has Prudential delivered for investors? Prudential's 4.4 million with-profits policyholders are today looking at theprospect of being more secure in their retirement as the company increases theirpolicy values by up to 17.5 per cent. This follows a very strong investmentreturn in Prudential's Life Fund in 2006 of 12.4 per cent (before tax andcharges). The majority of policyholders will see their policy values increase bymore than 10 per cent. We believe Prudential's with-profits investments continue to provide solidlong-term growth prospects for investors through increased payouts for allpolicies maturing in 2007 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. Policies in 2007 show increases compared with their position a year ago: • 10 year Prudence Bond - With-Profits Bond - (£10,000 single premium) up 10.9 per cent • 15 year Personal Pension (£200 per month regular premiums) up 11.4 per cent • 20 year Personal Pension (£200 per month regular premiums) up 11.8 per cent • 25 year Prudential With-Profits Mortgage Endowment up 11.8 per cent • 25 year Scottish Amicable With-Profits Mortgage Endowment up 12.7 per cent Notes: Both mortgage endowment examples based on £50 p.m. regular premiums, maleaged 30 at start of contract : All figures are after deduction of tax (where relevant) and charges. As in previous years, Prudential continues to show the 12-month growth achievedfor individual policyholders, as this is a more relevant measure than showingthem a comparison with a policy that matured a year earlier. Prudential's customers have benefited from the financial strength, diversity andoutstanding investment performance of its With-Profits Fund, compared with othercautious investments as follows: Prudence Bond's performance relative to alternative investment products Investment Product Total Payout Annualised Return Prudential With-Profits Bond £17,772 5.9%(10 year, £10,000 single premium)Average building society account £12,015 1.9%Average balanced managed unit trust £18,698 6.5% Average balanced managed £16,593 5.2% unit-linked life fund Notes 5 and 8 Prudential's Personal Pension performance relative to alternative investmentproducts Investment Product Total Payout Annualised return Prudential With-Profits Individual Pension £119,401 8.4%(20 year term, £200 per month regularpremiums)Average building society account £67,066 3.2%Average balanced managed unit trust £119,127 8.3%Average balanced managed £114,352 8.0%unit-linked pension fund Note 5, 8 and 9 How does Prudential compare? Prudential's with-profits investments continue to hold their own against thealternatives available to investors and at a level of risk that is oftensignificantly lower than other actively managed multi-asset investments. In 2006, Prudential's Fund return of 12.4 per cent represented a significantout-performance over the average sector returns of: Balanced Managed Funds 9.1per cent; Distribution Funds 5.9 per cent; Cautious Managed Funds 6.8 per cent;and cash at 3 per cent. This performance demonstrates that investing inwith-profits with Prudential works. Source: Financial Express average life fund sector fund performance andFinancial Express FINEX 90 day deposit performance, both between 31/12/2005-31/12/2006 However, this year's announcement is not just about the results in 2006. Over 5years, our Fund has outperformed the FTSE 100 and FTSE All-Share indices, aswell as the UK Average Cash and Fixed Interest Fund benchmarks. Take a look atthe facts: Fund / Index Total return over 5 years Prudential With-Profits Fund 63.8%FTSE All Share (total return) 50.2%FTSE 100 (total return) 41.1%UK Average Life Fund 22.6%UK Average Cash Fund 13.9% Note 6 Similarly, the Fund has performed exceptionally well over a 10-year period(161.9 per cent) when measured against the funds of our major competitors in theUK who have declared bonuses so far this year and the FTSE 100 and FTSEAll-Share indices. We believe our investment performance and the values we are adding to plansstand out from the competition. For example, a typical payout for a 25-yearendowment maturing in 2007, on a male life (age 30 next birthday at outset,non-smoker, paying £50 a month) would be worth: • £49,492 if invested with Prudential • £43,451 if invested with Norwich Union, and • £38,054 in a Standard Life plan Source: Prudential, Norwich Union and Standard Life 2007 Bonus Announcements Gary Shaughnessy continued: "Our longstanding customers continue to enjoy thebenefits of investing with Prudential across different market conditions.Consistency is important to them and our investment performance over five and 10years has continually outperformed a number of market indices and the vastmajority of other with-profits funds. "This demonstrates clearly that with-profits, by being invested in an activelymanaged, well-run and financially strong fund, can produce good returns for thecautious investor. Our customers have done exceptionally well, not only whencompared to investing in with-profits with other companies, but againstalternative multi-asset investments, and crucially, at a lower level of riskthan direct investments in the UK stock market." When compared with values being paid by many other major providers this year,Prudential customers are better off up to the tune of: £40,481 on 20-yearindividual pension; £1,259 on the 10-year surrender value of a single premiumwith-profits bond; and £11,438 on a maturing 25-year with-profits endowment.Note 7 This strong performance is in a large part due to Prudential's skilledinvestment management; its prudent stewardship of the Fund; the freedom, throughsustained financial strength, that allows it to invest in 'real' assets and inturn review the asset mix to reflect its views on markets. This focus onmaintaining the financial health of the Fund is central to the rigorousmanagement process that Prudential applies to with-profits investing. 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." In July 2006 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. James Smith, of Investment Week, wrote: "Prudential is one of the few to winplaudits for performance and major asset allocation calls on its multi-billionwith-profits portfolio. After all, how many fund management groups can claim ademonstrable track record in asset allocation that incorporates correct calls onthe dotcom bubble and subsequent market recovery?" (Source: Investment Week - 29/01/07) -Ends- Full details of Prudential's 2007 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 856011Steve Colton Tel: 0207 150 3136 Mobile: 07771 531525Juliette Emblem Tel: 0207 150 2657 Mobile: 07802 486414 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 you 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 achieved an excellent performance, with a totalreturn of 12.4 per cent (before tax and charges) in 2006. All investors willdirectly benefit. Over five years to 31 December 2006, it has achieved a total return of 63.8 percent, against 41.1 per cent for the FTSE 100 (total return) index and 50.2 percent for the FTSE All-Share (total return) index. Over 10 years, the fund hasreturned 161.9 per cent against 102.7 per cent for the FTSE 100 (total return)index and 114.0 per cent for the FTSE All-Share (total return) index. (All figures to 31 December 2006, 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 £237.5 billion (as at 30 June 2006) and more than 300investment professionals around the world. Within the With-Profits Fund, which, including the Scottish Amicablewith-profits fund, accounts for £85billion of the total funds invested - itsgeographical and sector portfolios are run by different managers. This resourceis co-ordinated by the Portfolio Management Group (PMG), which acts as 'managerof managers' for the Prudential Group and is responsible for asset allocationand 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 The fund's asset allocation is actively managed and has played a major part inits successful long-term performance. With-profits contracts are long-term contracts with relatively low guaranteedamounts, and this, combined with the strong financial position of the fund,enables Prudential to invest primarily in equities and property. At the end of 2006 the equity backing ratio (equity plus property plusalternative assets) was 70.8 per cent which is considered to be a 'slightlyhigher than neutral' weighting. We believe broadly that equities offer goodvalue, with a number of markets in Asia and Europe looking especiallyattractive. UK commercial property generally looks expensive though we havefound opportunities in overseas markets in the US, Europe and Asia. The exposureto alternative assets such as hedge funds and infrastructure is expected toincrease slowly over time as opportunities arise. In bonds, the fund has moved over the year to generate more diversification byinvesting further in the US, and has moved to increase the average credit ratingon the fund (i.e. has become more defensively positioned). The fund remains extremely well-diversified geographically, by asset type andwithin the underlying stock portfolios, which we believe is an attractivefeature of Prudential's with-profits proposition. It helps reduce risk or expected volatility by insulating the total fund frompotential weakness in any particular market or stock. The active management ofthe asset mix in recent years has had a substantial beneficial impact oninvestment returns. The broad asset mix will continue to be reviewed as the economic environment andmarket valuations change. Current Asset Mix 31/12/06 31/12/05 31/12/04 31/12/03 31/12/02 % % % % % Equity shares - UK shares 36 40 33 33 32 - Non-UK shares 17 19 15 15 13 Property 15 15 18 17 18 Alternative investments 3 2 2 2 2 Fixed interest 25 21 29 31 33 Cash 4 3 3 2 2 Total 100 100 100 100 100 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 £13.7 billion ofthe £85 billion under management. Since the takeover of Scottish Amicable byPrudential in 1997 the fund has benefited from the same investment process asthe Prudential fund. The Scottish Amicable fund delivered an investment returnof 11.8 per cent in 2006. Over five years the fund has delivered 62.9 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 The exceptionally strong investment performance means we are able to deliverexcellent year-on-year increases for the vast majority of policyholders. • Payout values increased by up to 17.5 per cent on pensions • Payout values increased by up to 15 per cent on with-profit annuities • Payout values increased by up to 11 per cent on Prudence Bond How the investment performance relates to policyholders The strong performance of the fund means that Prudential is able to increasepolicy values for the majority of with-profits policies maturing in 2007, byover 10 per cent. 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 2006 was 10.9 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 2007 compared with the value in 2006. 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 in Cash-in ValuesWith-Profits Bond Bond's Value #Policy Duration Single Premium Bond Value Bond Value Increase in Value over 2006In 2007 (2006) 2007 2006 % 5 years £10,000 £14,152 £12,703 £1,449 11.4%(4 years)7 years £10,000 £14,097 £12,987 £1,110 8.5%(6 years)10 years £10,000 £17,772 £16,031 £1,741 10.9%(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 £17,772 5.9%(10 year, £10,000 single premium)Average building society account £12,015 1.9%Average balanced managed unit trust £18,698 6.5%Average balanced managed £16,593 5.2%unit-linked life fund Note 5 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 £17,772 over the ten years up to 1 May 2007. By investing withPrudential over the last 12 months, the policyholder's bond is worth 10.9 percent more than it was on 1 May 2006. This value represents an overall return of5.9 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 forFor policies maturing in 2007 Policy's Value premiums paid during the year Policy Duration Regular Policy Policy Value Increase in Value 2006 over 2006In 2007 (2006) Premium Value 2007 % 5 Years £200 p.m. £15,263 £11,455 £3,808 11.2%(4 years)10 Years £200 p.m. £32,750 £27,305 £5,445 10.7%(9 years)15 Years £200 p.m. £63,253 £54,525 £8,728 11.4%(14 years)20 Years £200 p.m. £133,301 £111,062 £22,239 17.5%(19 years) *Prudential Personal Retirement Plan for policy duration of 19 and 20 years Note 8 Prudential's Personal Pension performance relative to alternative investmentproducts Investment Product Total Payout Annualised return Prudential With-Profits Individual Pension £133,301 9.3%(20 year term, £200 per month regular premiums)Average building society account £67,066 3.2%Average balanced managed unit trust £119,172 8.3%Average balanced managed £114,352 8.0%unit-linked pension fund Notes 5, 8 and 9 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 £133,301. Ifthe same customer had decided to transfer the policy last year, he would havelost out on the 17.5 per cent increase had he kept the policy 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, after25 Year Policy (male 30 next Policy's Value allowing for premiumsbirthday at outset) paid during the year Policy Duration Regular Policy Policy Increase in Value over 2006In 2007 (2006) Premium Value Value % Date 2007 Date 2006 10 years £50 p.m. £7,472 £6,293 £1,179 8.8%(9 years)15 years £50 p.m. £14,054 £12,300 £1,754 9.2%(14 years)20 years £50 p.m. £26,557 £23,653 £2,904 9.6%(19 years)25 years £50 p.m. £49,492 £43,674 £5,818 11.9%(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 £49,492 8.5%month regular premiums; male aged 30 nextbirthday at outset)Average building society account £22,988 3.2%Average balanced managed unit trust £57,138 9.5%Average balanced managed £41,292 7.3%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, paying a premium of £50per month, the payout value on a policy maturing this year is £49,492, whichreflects an 8.5 per cent return (net of tax and charges), for each of the 25years. Note: all figures after tax and charges SCOTTISH AMICABLE: Scottish Amicable Personal Pension 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 % Date 2006 over 2006In 2007 (2006) Premium Value Date 2007 5 Years* £200 p.m. £15,983 £11,965 £4,018 12.2%(4 years)10 Years £200 p.m. £35,619 £28,938 £6,681 14.1%(9 years)15 Years £200 p.m. £69,048 £58,352 £10,696 13.9%(14 years)20 Years £200 p.m. £125,582 £108,325 £17,257 13.5%(19 years) *PAC (Ex-Scottish Amicable Life) policy. Note 8 Scottish Amicable's Personal Pension performance relative to alternativeinvestment products Investment Product Total Payout Annualised return Scottish Amicable With-Profits Individual Pension £125,882 8.7%(20 year term, £200 per month regular premiums)Average building society account £67,066 3.2%Average balanced managed unit trust £119,172 8.3%Average balanced managed £114,352 8.0%unit-linked pension fund Notes 5 and 8 All figures before tax but after charges 3. With-Profits Annuities Key points: • With-profits annuities income increased by up to 15 per cent for the coming year • Five-year overall average bonus up to 8.2 per cent (from 5.6 per cent) • Regular Bonus held at 2.75 per cent for fourth year running • As a result, all with-profits annuitants, regardless of their Anticipated Bonus Rate, will receive an increase in income at their annual review in 2007/8 With-Profits Annuities (WPA) WPAs are invested in the with-profits fund and promise to pay retirees an incomefor the rest of their life. 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 lower. How With-Profits Annuities work Conventional annuity payments are backed by fixed-interest investments (mainlycorporate bonds), so when the yield on bonds falls - as it has recently - so doannuity rates. Conventional annuity rates are at their lowest for more than 30years, and while these are essentially risk-free, savers who are considering aconventional annuity now will be locking themselves into these relatively lowrates. WPA, 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 2003: Product Starting income Income paid in Increase in income Total income in Extra income over 2003/04 2007/08 over 2003 five years since level annuity 2003 after 5 years Pru WPA (ABR 3%) £3,522 £4,474 £951 £19,642 12% Level £3,522 £3,522 - £17,612 N/A RPI Linked £2,591 £2,944 £353 £13,748 -22% Note: 1. The amount of the additional bonus is not guaranteed and it may vary or be discontinued at any time. However, once added it will remain unchanged until the next yearly review. 2. The anticipated bonus rate (ABR) determines the starting income and is used to calculate 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 in the next year will increase. If they are lower, the annuity income will drop. 4. Mortgage Endowments Key points: All Prudential and an estimated 96 per cent of Scottish Amicable endowmentsmaturing in 2007 will meet repayment targets • We expect 11,051 Prudential policies to mature in 2007, and the average surplus is expected to be £4,400. • We expect 21,300 Scottish Amicable policies to mature in 2007. Of these, an estimated 96.3 per cent will meet repayment targets, the average surplus expected to be £3,190. Of the 790 (3.7 per cent) which are not anticipated to meet their target amount, the average shortfall is expected to be around £390. • All Prudential endowments maturing in 2006 met their repayment targets - the average surplus on policies was £3,350. • 95.5 per cent of Scottish Amicable endowment policies maturing in 2006 met their repayment target with an average surplus of £2,746. The remaining 4.5 per cent (936 policies) had an average shortfall of £894. Payout values for mortgage endowment customers Prudential Prudential With-Profits Mortgage Year-on-Year Increase in a Annual Increase inEndowment cash-in values, after Policy's Value allowing for premiums25 Year Policy (male, 30 next paid during the yearbirthday at outset) Policy Duration Regular Policy Policy Increase in Value over 2006In 2007 (2006) Premium Value Value % Date 2007 Date 2006 10 years £50 p.m. £7,299 £6,146 £1,153 8.6%(9 years)15 years £50 p.m. £13,393 £11,721 £1,672 8.9%(14 years)20 years £50 p.m. £25,715 £22,903 £2,812 9.5%(19 years)25 years £50 p.m. £46,695 £41,207 £5,488 11.8%(24 years) Note 8 Prudential mortgage endowments performance relative to alternative investmentproducts Total Payout Annualised return Prudential With-Profits Endowment (25 Year Term, £46,695 8.1%£50 per month regular premiums; male aged 30next birthday at outset)Average building society account £22,988 3.2%Average balanced managed unit trust £57,138 9.5%Average balanced managed £41,292 7.3%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 £46,695, which isequivalent to 8.1 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 inMortgage Endowment cash-in values, after Policy's Value allowing for premiums25 Year Policy (male 30 next paid during the yearbirthday at outset) Policy Duration Regular Policy Policy Increase in Value over 2006in 2007 (2006) Premium Value Value % Date 2007 Date 2006 10 years £50 p.m. £7,199 £5,972 £1,227 10.0%(9 years)15 years £50 p.m. £14,368 £12,407 £1,961 10.7%(14 years)20 years £50 p.m. £25,399 £23,223 £2,176 6.7%(19 years)25 years £50 p.m. £47,650 £41,732 £5,918 12.7%(24 years) Note 8 Scottish Amicable's mortgage endowment performance relative to alternativeinvestment products Total Payout Annualised return Scottish Amicable With-Profits Endowment (25 £47,650 8.3%Year Term, £50 per month regular premiums; maleaged 30 next birthday at outset)Average building society account £22,988 3.2%Average balanced managed unit trust £57,138 9.5%Average balanced managed £41,292 7.3%unit-linked life fund Notes 5 and 8 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 £47,650, which isequivalent to 8.3 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 201,000 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 their target values (the average surplus was £3,350). • We expect 11,051 policies to mature in 2007, all of which are anticipated to meet repayment targets. The expected average surplus is £4,400. 2007 2006 2005 2004 2003 Green 66% 60% 51% 41% 24%Amber 19% 27% 24% 29% 32% 85% 87% 75% 70% 56% Red 15%* 13% 25% 30% 44% *In general, Prudential endowments policies maturing now, are green. Therefore,if nothing else changes, the number of green letters will reduce as greenpolicies mature and in turn as a percentage of the overall total Red or Amberstatus policies will increase. Scottish Amicable Scottish Amicable has approximately 465,000 plans in force. • 19,000 Scottish Amicable mortgage endowments matured in 2003, of which 2,700 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 (11 per cent) that did not meet their target amount there was an average shortfall of £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 that did not meet their target amount there was an average shortfall of £49. • 20,966 Scottish Amicable mortgage endowments matured in 2006, of which 20,030 (95.5 per cent) met their repayment targets, the average surplus being £2,746. Of the 936 (4.5 per cent) that did not meet their target amount there was an average shortfall of £894. • We expect 21,300 policies to mature in 2007 with an average surplus of £3,190. Of the 790 (3.7 per cent) policies, which are not anticipated to meet their target amount, the average shortfall is expected to be around £390. 2007 2006 2005 2004 2003 Green 54% 41% 24% 16% 13%Amber 36% 43% 42% 31% 22% 90% 84% 66% 47% 35% Red 10% 16% 34% 53% 65% 5. How bonus rates are managed by Prudential Again in 2007 annual bonus rates are being maintained on all policies. When wedecide on the rate of the annual bonus, the main thing we consider is the returnwe expect our investments to earn in the future. We hold some of this returnback 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 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 you 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 Prudential'sFlexible Investment Plan. PruFund: 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 MVR may be applied. You may not get back the full amount of your investment and, for investments in the With-Profits Funds as above, the value of the policy depends on 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 an indication of how we expect the PruFund Growth fund to grow over the year and assumes no regular withdrawals are taken. The Expected Growth Rates for the funds can be found on www.pru.co.uk, these are reviewed at the end of each quarter and are not guaranteed. 7. Annual and final bonus rates for 2007 Total bonus rates (which is the combination of annual and final bonus rates)increased on all unitised plans and excellent year-on-year increases in thevalue 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 to gradually 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 per cent p.a. gross. Annual bonus rates are being maintained on all policies. • Final (or terminal) bonuses may be added when the benefits of a policy mature, 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 2007 2006 Change 2007 2006 ChangePrudence Bond (Optimum Return) No 3.25 3.25 0.00 5.2 5.2 0.00Initial ChargePensionPru Personal Pensions 3.25 3.25 0.00 6.75 6.75 0.00Mortgage Endowments 1.00/ 1.00/ 0.00 N/A N/A N/A 2.00* 2.00*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? Fewer than 500 policyholders may not see an increase in their policy values. The issue for them is not that they won't see their annual bonus maintained -they will - but rather it is the impact of charges in the early years on along-term policy. This means that over the course of the year, the chargesapplied are slightly higher than the bonus paid, thereby reducing the value ofthe fund on a net basis. 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 2007 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 2006 and thenprojected to 1 May 2007 using the most recent returns. 3. The Micropal UK Savings Indices assumed are gross of tax for pensionproducts, net of tax for life products (net of tax, for Prudence Bond) and arefor deposits of £2,500+ at 7 day notice or better. The unit trust returns arebased 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. Source: Prudential / Lipper Hindsight. All figures to 31 December 2006 beforetax, charges and the effects of the smoothing process. Past performance is noguide to the future. 7. Examples of payouts Individual Pension Cash Value 20 Year Term (£200 pm) Company Final 2007 Final 2006 Change £ £ %Prudential - PPRP 133,301 127,680 4.4Standard Life 92,820 102,365 -9.3 With-Profit Bond - £10,000 SP 10 year SV Company Final 2007 Final 2006 Change £ £ %Prudential - PIB/PSA 17,852 18,189 -1.9Prudential - Pru Bond 17,772 18,137 -2.0Commercial Union 16,863 16,654 1.3CGNU (ex GA) 16,739 16,797 -0.3Norwich Union 16,513 16,869 -2.1 With-Profits Endowments 25 Year Term Company Final 2007 Final 2006 Change £ £ %Scottish Amicable 50,815 51,881 -2.1Prudential 49,492 49,486 0.0CGNU Life 47,904 51,927 -7.7Commercial Union 46,152 51,111 -9.7Norwich Union 43,451 46,652 -6.9Standard Life 38,054 41,806 -9.0Provident Mutual 34,747 38,061 -8.7 Based on a male 30 next birthday, paying £50 per month 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. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Prudential