With-Profits

On our one year performance to 31/12/11, the investment return of the PAC With-Profits Fund has been positive, at over 2% (gross of tax). And, for most unitised With-Profits Pension and Bond contracts the year on year increase in policy value, as a result of the bonuses declared will be in the range of 3% to 6%.

Prudential continues to pay regular bonus rates in 2012:

Delivering smoothed returns to customers

2011 is a great example of showing exactly how our smoothing process works, in that it has smoothed some of the extreme ups and downs of short-term investment performance in order to provide a more stable return. We have held back some of the investment returns in the good years and have used this to support bonus rates this year, where the investment return has not been so good. This is exactly what our With-Profits Fund is designed to do.

Changes to asset mix of the fund

A core element of our approach to managing the fund is to reduce exposure to volatility. 2011 was a year of extreme uncertainty which leads us to focus on higher weightings in the typically more reliable asset classes such as fixed income and property. We have reduced volatility by currency hedging and improving diversification in the fund. Similar strategies will continue in 2012. We have also protected against adverse moves in interests rates and equities by hedging. The policy of reducing our equity backing ratio was initiated over two years ago. The reduction means we have more in fixed income which performed well in 2011.

During 2011, the fund maintained a risk asset exposure (equity plus property plus other investment assets) above 50% though it fell a little from 55.6% to 52.9% as equities weakened on concerns about government debt in Europe. In terms of active management our exposure to equities was reduced in July before markets panicked about the European debt crisis and global economic slowdown. We then partially re-added our equity weighting in October. Selling equities in July meant the fund avoided a loss in the Q3 market falls.

We still have concerns about the very low level of interest rates on UK, US and German government bonds and have reduced duration on the fixed income portfolio to offer some protection against a sudden rise in interest rates.

Generally speaking, the fund remains more cautiously positioned than in recent years and this is likely to remain so given the growing concerns we have over the Eurozone crisis. We are confident that our current Fund structure is the result of a sound approach to asset allocation and our financial strength gives us the flexibility to adapt as markets change.

Fund Management

The investment strategy followed by the PMG for our PAC With-Profits Fund is designed to deliver steady performance over the medium to long-term. They do this by investing in a wide range of assets including equities, property and bonds coupled with the smoothing of investment returns.

“We have always said that the fund would be managed for the long term and we believe that our long term investment record shows an ability to manage the assets well through the ups and downs of the cycle and through a range of different types of market and economic environment. The outlook now is especially uncertain but it’s not so different to phases we have seen and sensibly dealt with in the past.

We believe that in periods of uncertainty, our brand, our capital strength, the ability to smooth investment returns, the degree of diversification we can offer and the returns we have delivered stands out and will be appealing to many investors. In more difficult and uncertain times only the good providers will do well. We believe that the inherent strengths of the Prudential’s with profits business will see us prosper in more difficult and challenging times as well as the good times.”

Martin Brookes, Director, Portfolio Management Group (PMG).

Investing for the long-term - strong performance of Prudential's With-Profits Fund

Further evidence of our strong performance over the medium to long term can be seen in how well our With-Profits Fund performance compares to some of our major competitors over both 5 and 10 years to 31/12/2011. The cumulative return on the PAC With-Profits Fund, to 31 December 2011, was 17.6% and 92.7% respectively. These figures are gross of tax, before charges and the effects of smoothing.

Source: Prudential, Financial Express. All figures to 31 December 2011.
*With-Profits performance is gross of tax and before charges and the effects of smoothing.
**With-Profits performance is net of tax and before charges and the effects of smoothing.
Negative performance on some asset classes within the fund (such as equities) caused tax 'rebates' which has resulted in the net return being higher than the gross return for 2011.
*** ABI UK – Mixed Investment 20-60% Shares – The Association of British Insurers (ABI) has a classification system whereby the performance of funds that have similar asset allocations are grouped together to give an average performance figure. This is known as the sector average. It is important to note that some if not all of the Funds comprising this sector average will already have fund management charges deducted from their performance.

Please note, these figures are for comparative purposes only to show different fund returns of some of the major With-Profits providers in the UK. These are not the returns your client would necessarily get.
(1) - Standard Life returns are for years of 15.11. to 14.11. of the following year rather than calendar years up to, and including, 2003. Calendar years thereafter.
(2) - For 2006, 12.5% for Stakeholder pensions and WP Bonds only (around 10% of Standard's in-force WP business). Much lower returns for other classes of WP business
(3) - For 2007, 5.7% for WP Bonds; other WP rates 5.3%-6.7%
(4) - For 2008, -14.9% for WP bonds; other WP returns -0.3% to -20.2%
(5) - For 2009, 8.6% for WP Bonds; other WP returns 3.6% to 19.2%
(6) - For 2010, 13.3% for WP Bonds; other WP returns 10.8% to 13.0%
(7) Formerly known as AXA Sun Life

Source: Chartwell and WP Guides for 1997-2001;

2002 from bonus declarations and WP Guides. All L&G from 2002 bonus declaration. AXA Sun Life, Sun Life from press release; All from bonus declaration press releases.

2007 numbers from press releases; Sun Life, AXA Sun Life from FSA returns (Realistic Valuation)

2008 numbers from press releases except where stated; NU and CGNU from "Information Sheet (to accompany PPFM)" at http://www.norwichunion.com/savings-and-investments/ppfm.html; AXA Sun Life, Sun Life, from their FSA returns

2009 Numbers from press releases except where stated: Sun Life Assurance have been taken from their form 48 of their 2009 FSA Returns

Aviva WP Fund (formerly CGNU), Aviva WP Sub Fund (formerly NULAP) from Money Management Magazine April 2010

2010 Numbers from press releases except Aviva WP Sub Fund (formerly NULAP) from Money Management April 2011.

2011 Numbers from press releases.

Please note some companies aren't included as they've not yet declared as at 15 February 2012.

Past performance is not a reliable indicator of future performance.