What are With Profits funds?
With profits policies were originally developed by life insurance companies as a way of distributing profits arising from lower than anticipated death rates, lower than expected expenses and miscellaneous profits.
In a mutual organisation such as MGM Advantage, with profits policy holders share in the profits and losses of the company.
Not all with profits funds work in the same way. If you hold a Flexible Income Annuity, please visit the Flexible Annuity page here. For all other policies, please read on.
Funds paid in by customers – including with profits policy holders (conventional and unitised) are pooled. We then use the pooled assets to pay out claims.
Our with profits policyholders are also entitled to share in surplus from other sources. MGM International policy holders are only entitled to extraordinary surpluses. More on this can be found inWith Profits Your Guide, or the full Principles and Practices of Financial Management (pdf 137KB).
With Profits funds are invested in the stock market (equities, bonds, gilts or property). The return that we earn on these investments is passed back to with profits policy holders through the bonus added to the policies and it is this return that is the key factor in setting the level of bonuses.
Unlike other investments, with profits returns benefits from a special feature known as smoothing. Smoothing simply means that some of the investment returns are held back in the ‘good times’ when the stock markets are flourishing and used to enhance the final bonus rates when the returns from the market are not so good, ultimately protecting investors form the highs and lows of the stock market.
We decide the bonus (annual/final) rates awarded after considering a variety of factors such as the returns on investments and other business assumptions.
To prevent some with profit policyholders from getting more than their fair share of investment returns if they cash in their policy early, we sometimes apply a Market Value Reduction (MVR). The MVR is simply a mechanism of giving the policyholder his fair asset share. It works on the basis that if you want your money back at any time other than an agreed policy guarantee date, you should not expect to get back more than your investment has made in the fund. We believe this approach is the fairest for all with profits policyholders.
How does my MGM Advantage With Profit fund work?
Your investment, after any initial charges, is pooled with the investments of other customers who have invested in our With Profits fund. This pooling of investments enables us to invest in a wide range of assets on your behalf.
These assets are different types of investments; such as stocks and shares, property, fixed-interest assets and cash deposits. The proportion of the total fund we put into each type of investment will vary over time.
We also notionally split the whole With Profits fund for different groups of customers. For example, we have different fund groups, called sub-funds, for our Conventional, Unitised and Flexible Income Annuity with profits policyholders.
Your investment gives you a notional share in the appropriate sub-fund of our With Profits fund, and the value of your share will depend mainly on the performance of the assets from the date your investment is made.
Flexible Income Annuity policyholders
MGM Flexible Income Annuity policy holders share in some of the profits of the Society. Because customers of this product have used their pension savings to invest in a range of externally managed funds which they choose, the With Profits fund is not used for this purpose.
MGM Flexible Income Annuity customers are therefore entitled only to a share in the Society’s “other gains and losses” (see With Profits Your Guide for details) and mortality profits and losses from other Flexible Income Annuity customers. The bonuses declared will reflect these profits and losses.
Our With Profits Actuary advises the Society’s Board on bonus rates that are allocated to policyholders. Bonuses on the Flexible Income Annuity are declared annually, although we do not guarantee a bonus will be paid. There is no final bonus. The FIA smoothing policy is different from regular With Profits smoothing. It aims to distribute “other gains and losses” and mortality profits and losses broadly as they emerge, although extreme levels of profit or losses may be spread over a number of years.
For other useful documents about how we manage our With Profits business and our responsibilities and reporting arrangements, visit our Member Information pages.