Your guide to how we manage our With Profits fund

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Introduction

This guide explains to you how we manage our With Profits fund. It contains important information about how our life assurance, annuity, savings and investment plans work and how you can expect us to manage them. You may wish to read it alongside:

What is the With Profits fund?

Our With Profits fund is an investment fund. We combine your money with that of other investors to form the fund, and manage it on your behalf.

The fund invests in a range of carefully selected investments including:

The mix of investments held takes account of the current and projected financial strength of the fund and the expected returns available from different types of investment.

We review our investment strategy at least annually although the investment outlook and performance are monitored at least monthly.

Details of the current investment mix are available on our website, www.LV.com, or from our Head Office.

If you invest in the fund through one of our With Profits products, you become a ‘member’ of Liverpool Victoria Friendly Society Limited. As a mutual organisation we have no shareholders and use all distributed profits from the With Profits fund for the benefit of our members.

If you would like to find out more about the other benefits that are available to our members, please visit our website www.LV.com

What is the aim of the with profits fund?

Our principle aim is to provide a fair return on your investment. We make sure that the way we invest is compatible with the risks we tell people about when they invest in the fund and allows for any commitments that we have to our members.

The different ways of investing means there are different groups of members with different types of policies, taken out at different times and with different terms.

We aim to treat all groups of our members fairly, taking into account any conflicting interests between them.

What is a Conventional With Profits plan?

A Conventional With Profits plan will give you a guaranteed minimum return on your investment, as long as you pay the premiums that you agreed to when you took it out.

For example:

As an absolute minimum, we will pay you the guaranteed return on your plan. Any guarantee will be set out in your Policy Document. We also aim to increase the guaranteed return of your plan by adding bonuses to the guaranteed amount.

If you stop your plan early we may reduce the guarantees on your policy.

The guarantees provided by Conventional With Profits policies can be a valuable benefit for you as it can be difficult to take out a plan with the same kind of benefits now.

How do we decide the return on your plan?

Our aim is to make sure that every investor receives a fair return. The overall return you will receive will be calculated allowing for the premiums you have paid into your plan, deductions made to cover our expenses, tax and the cost of providing benefits, plus investment returns from the With Profits fund. We may also add profits from other business activities that we take part in. Investment returns have the most significant impact on the return from your plan.

Our aim is to increase the value of your plan by adding bonuses. Please see – ‘What bonuses do we pay?’.

We aim to cushion you from the effects of the ups and downs of the stockmarket by smoothing investment returns. This affects the return you receive from your plan. – Please see ‘How do we cushion you from the ups and downs of the stockmarket?’.

For policies that are paid out when they reach the end of their term, we aim to pay amounts that are between 75% and 135% of the value of the investments supporting the policy, before allowing for smoothing. Based on the smoothed value of the investments, we aim to pay between 95% and 105% of the value.

What bonuses do we pay?

There are two types of bonuses that we may add; regular bonuses, which might be added through the life of your plan (usually each year), and final bonuses, which might be added at the end of your plan.

For a With Profits Pension Annuity we may add a Top Up bonus to your plan, rather than a final bonus.

Regular bonuses

We aim to add regular bonuses during the life of your plan to provide steady growth. The amount of regular bonus is set at a prudent level taking account of the underlying investments within the fund and its current and projected financial strength, including any commitments to members. The amount of bonus added may vary depending upon the type of plan you hold, and for the With Profits Pension Annuity (Series 3 onwards) by calendar year of entry. We review the level of bonuses we pay at least annually.

For most conventional policies (excluding our With Profits Pension Annuity), we aim to add regular bonuses to increase your guaranteed benefit. Once we’ve added a regular bonus, we won’t take it away. We aim not to alter the regular bonus rate by more than 50% from one year to the next.

If guaranteed benefits are worth more than the value of the actual investments supporting policies, then bonuses added may be low or nothing.

Please see your Key Features document for further details.

Final bonuses

A final bonus may be paid when your plan comes to an end. A final bonus is a way of ensuring that, overall, you receive a fair return on your investment over the lifetime of your plan.

For most major types of Conventional With Profits Plans, rather than work out the value of each individual policy we look at a sample of policies in deciding the level of final bonuses to pay.

For final bonuses we decide what level of bonus to add by:

So, if the regular bonuses added during the life of your plan do not represent what we believe to be a fair return we aim to add a final bonus to increase the final value of your plan. We review final bonuses at least once a year and may do so up to four times a year.

With some products, a high proportion of the final value of a plan can be from the final bonus, as paying a lower guaranteed regular bonus can allow our fund managers more flexibility to invest in areas that can provide potentially better returns.

Top Up bonuses

For the With Profits Pension Annuity, a Top Up bonus may be applied in any year. If a Top Up bonus is applied, the bonus rate we use depends on when your annuity started and will result in an increase to the annuity paid in that year. For the With Profits Pension Annuity (Series 3 onwards) the Top Up bonus will not take smoothing into account if the impact of smoothing is greater than 10%.

How do we decide how much you get if you leave your plan early?

Some plans have a fixed term, which will be set out in your Policy Document. If you leave your plan early (surrender your plan), we work out how much to pay you with the aim of being fair to you and those policyholders remaining in the fund. For policies that are surrendered, we aim to pay amounts that are between 75% and 135% of the value of the investments supporting the policy, before allowing for smoothing.

How do we cushion you from the ups and downs of the stockmarket?

As explained earlier, our fund invests in a number of different ways, including in the shares of UK and overseas companies, commercial property and fixed-interest investment. Shares are often called equities and are bought and sold on stockmarkets throughout the world. We believe it is important for us to invest in shares. This is because historically, over the longer term, the return from shares has been higher than other safer investments, like government bonds and cash. This helps us to provide you with the potential for better returns from the fund over the long term. However, the downside of shares is that they can be volatile – with values changing quickly (up and down) over short periods of time. In particular, in the past we have seen how some specific world events can cause values to fall sharply. We aim to cushion you as far as possible from the day to day volatility of investment returns, by ‘smoothing’ out the effects of some of the ups and downs. We do this in two ways. First, we invest in a wide range of types of investment and, within these, limit the amount we invest in any one specific investment. Secondly, instead of just adding large bonuses in good years and no bonuses in bad years, we aim to hold back some of the investment profit made in good years and release it in the bad years. This means you receive a more ‘smoothed’ return on your plan. So if, for example, your plan happened to end on a day when the stockmarket drastically fell, the smoothing of returns might help protect you from a sudden drop in value. This smoothing effect allows the investment performance to be cushioned from the daily fluctuations, either upwards or downwards, of the stockmarket. Investors in funds that don’t smooth returns could see the value of their investments rise or fall faster than those in a smoothed fund. For Conventional With Profits plans, except for the With Profits Pension Annuity, we smooth investment returns over a 5 year period. For the With Profits Pension Annuity (Series 2 onwards) we smooth investment returns over a 2 year period. For With Profits Pension Annuity (Series 1 only) we smooth investment returns over a 2 and a 5 year period, using the smoothing period that provides the higher annuity amount. The aim of smoothing is to protect you from the temporary ups and downs of the stockmarket. We do not use it as a source of profit or loss. Because returns are smoothed, it’s possible that when you cash in your policy, or when it comes to the end of its term, the amount paid out may be higher or lower than the value of the investments supporting the policy. We also aim to smooth payouts on policies of the same type and the same term, so that they do not change by more than 20% from one year to the next.

What expenses are charged to the with profits fund?

As with any investment, there are expenses involved in setting up and administering a With Profits plan – for example, commission payments, administration costs and other expenses. For Conventional With Profits policies, these expenses are charged directly to the fund and therefore affect the amount we may pay out.

How do we decide what business risks to take?

As with any With Profits fund, there are potential business risks arising from being a With Profits provider (including product design features, selling and marketing practices, interest rates and investment returns). We may also take other business risks with the aim of increasing the returns on your plans. We will therefore consider business opportunities that can provide a source of profit to the fund. For example, the With Profits fund owns our general insurance company and bank. We might also consider undertaking other business risks from time to time. Any business opportunities involve an element of risk, and it is important that we are careful about the amount of risk we take. To achieve this, our Board of Directors has to approve anything that represents a significant business risk. Our Board will only approve business risks if the expected benefits from the opportunity, are at least as good as the benefits we think we could get from alternative investment opportunities. Good business decisions can increase the bonuses we are able to provide. However, if we did take on a business risk that ended up being loss making, this could reduce the bonuses we are able to add to plans.

What is "the inherited estate" and how do we use it?

The inherited estate is the amount of money, built up from profits from the With Profits fund, that is in excess of a realistic assessment of the liabilities of the With Profits fund. The inherited estate provides capital for the With Profits fund and supports its operation. We don’t aim to actively increase the size of the inherited estate further, it is something that has built up since we came into existence in 1843. The inherited estate is used for the benefit of our members in a variety of ways. For example, it can:

A low level of inherited estate would generally restrict us in the way we invest, which could have a negative effect on the returns we could provide to our members.

Maintaining a reasonable level of inherited estate gives us the financial strength to invest more in shares, which we believe provide the potential for better returns to our members over the longer term.

We decide how to use the inherited estate by making sure we realistically assess its size, and then considering the best way of using it to maximise returns for our members.

We manage the inherited estate in the best way we see fit for the benefit of the people who invest with us. The inherited estate has been built up over many previous generations of policyholders and therefore there is no obligation to distribute it to the current generation of members.

Could we ever close the with profits fund to new business?

We will allow people to invest in the With Profits fund as long as we believe it is in the interests of both our existing and new members.

What would happen if we stopped accepting new business?

In the event of us permanently ceasing to accept new investments into the With Profits fund and not carrying out any business activity, we would aim to share out the inherited estate over the lifetime of the remaining plans held in the With Profits fund. We would aim to do this in a way that was fair to the remaining members, we might consider changing the way the With Profits fund is invested and our approach to smoothing of returns in order to achieve this.