With Profits Glossary
Conventional With Profits Policies
Conventional With Profits contracts have a basic sum assured to which annual bonuses are added, usually on the 1st April each year. These bonuses are “reversionary”, which means they are paid, in full, on a death claim or maturity. On surrender, a proportion is paid to reflect early payment.
Unitised With Profits Policies
Unitised With Profits have units which increase each day by 1/365th of the Annual Bonus.
Bonuses – Conventional and Unitised (see below for Flexible Income Annuity bonuses)
There are two main types of bonus that can apply to your policy, ‘Annual’ and ‘Final Bonuses’
In deciding bonus rates, we will take account of the following factors:
- The underlying share as described in MGM With Profits Your Guide
- Our stated smoothing policy
- The extent to which we need to maintain a cushion to adequately reflect the solvency of the fund.
We do not always guarantee that bonuses will be added to your policy, and different types of policy can receive different bonuses.
Our With Profits Actuary advises the Society’s Board on bonus rates that are allocated to policyholders.
We review bonuses at least once a year, but we can change them at any time.
Annual Bonuses
We try to keep the Annual Bonus rate relatively level from year to year rather than make dramatic changes. This means that we may declare a lower Annual Bonus than we expect to earn in an average year, with the balance being given in the form of a Final Bonus.
For conventional with profit policies Annual Bonuses are applied to your investment with us every year.
For unitised with profit policies units increase each day by 1/365th of the Annual Bonus.
Final Bonuses
A Final Bonus may be added at the end of your investment in the With Profits fund.
Any Final Bonus will ensure that your total payout reflects your fair share at the time of exit, subject to any smoothing adjustment as described below.
Smoothing
We may ’smooth’ the fund performance to provide some protection from the ups and downs of the stock market. Smoothing will not prevent future bonuses from reducing or stopping if investment returns remain low for a period.
We can change how we do smoothing at any time. How much affect smoothing may have still depends on investment performance and our need to be fair to all investors in the With Profits fund.
The reality of our smoothing policy is reflected in the Annual and Final Bonuses declared and, where necessary, any applied MVR.
Market Value Reductions
For some unitised policies we can also make what is called a ‘Market Value Reduction’ (or MVR). This can also be called a ‘Market Value Adjustment’ (or MVA). If other investors exit the With Profits fund when their ‘fair share’ value is below the smoothed value, an MVR is applied to protect the remaining with-profits investors. A Final Bonus will not be added to a policy where an MVR is applied.
An MVR may significantly reduce what is paid out on a policy compared to the smoothed value.
The terms and conditions of your policy may restrict the size of any MVR we can introduce, in light of the fair share levels at the time.
Of course, the MVR (if any) cannot reduce any guaranteed minimum payouts, and you can check whether an MVR applies simply by contacting us.
Your policy may also give you a date, or dates, on which an MVR will not apply, even if they would otherwise be in force.
After introducing an MVR, we will review if it should still apply
- at least once every three months
- if annual bonus levels change
The Society is also able to impose an MVR at other times, for example when there are adverse market movements, in order to maintain fairness between policyholders exiting the Fund and those remaining in it.
Flexible Income Annuity Bonuses
Flexible Income Annuity customers become members of the Society but they invest directly into a range of externally managed funds and not the MGM with profits fund.
As a result, Flexible Income Annuity customers are only entitled to a share of the Society’s “other gains and losses,” plus mortality profits and losses from other Flexible Income Annuity customers. This is distributed through a Member Bonus which is awarded annually. Member Bonuses are not guaranteed but they will never be negative.
Flexible Income Annuity customers do not receive final bonuses. See “Membership – Your Guide” for more information.
Principles and Practices of Financial Management (pdf 137KB)
We explain how we manage the With Profits fund and how we allocate bonuses in a document called the Principles and Practices of Financial Management
The PPFM is a rather technical document and we’ve produced this customer friendly version.