Publication of Principles and Practices of Financial Management for with-profit funds

Article date: 29 April 2004


  1. What are PPFMs?
  2. Realistic balance sheets and their impacts
  3. Future of with-profits
  4. Revised projection rates for Provident Mutual (PM) and NorwichUnion Life & Pensions (NULAP) with-profit funds and theintroduction of a guarantee charge on NULAP policies.

1. What are PPFMs?

In accordance with new regulations applying to all with-profitfunds, Norwich Union will be publishing the Principles andPractices of Financial Management (PPFM) for each of itswith-profit funds by 30 April 2004. The new documents seek toexplain the management of each of the with–profit funds andinclude an explanation of the following key points:

  • The amount payable under a with-profits policy
  • Investment strategy
  • Calculation of asset share
  • Business risks undertaken
  • How charges and expenses are treated
  • Management of the inherited estate
  • Volume of new business and arrangements on stopping taking newbusiness
  • Equity between the with-profits fund and shareholders.

In accordance with the new regulations, the Norwich Union Lifeboard will have to certify each year that the funds have beenmanaged in accordance with the stated principles and practicesoutlined in the PPFMs. There will also be an independent externalreview confirming this has happened.

The publication of the PPFMs will greatly increase thetransparency with which with-profits funds are operated and willgive policyholders further reassurance that the funds are being runin the agreed way. The new documents will be published on our website at: Norwich Union will beinforming customers about the availability of PPFMs when it sendscustomers their annual with-profits statement. The FSA is currentlyconsulting on the possible introduction of "more consumer friendly"versions of the PPFMs.

2. Realistic balance sheets and their impacts

In the light of the new realistic reporting regime beingintroduced for 2004, Norwich Union has included within its 2003 FSAreturn, information on the strength of its three main with-profitfunds on a "realistic" basis. This shows total surplus assets of£4.3bn, 2.6 times the Risk Capital Margin with no need for supportfrom shareholder funds. Full details of the realistic reportingfigures are shown in notes to editors.

Norwich Union chief actuary, Mike Urmston, said: "We are verysupportive of the new reporting regime. Norwich Union’sinitial results on this basis show how strong and resilient itswith-profit funds are when measured under the tough newrequirements. The introduction of PPFMs demonstrates even greatertransparency in with-profits reporting and we now have a completepicture linking together realistic reporting, investment policiesand bonus declarations."

3. Future of with-profits

Norwich Union remains committed to with-profits and believesthat it is still a key part of the investment offering for manycustomers, continuing to deliver the benefit of investing in adiversified pool of assets with smoothing of returns.

Mike Urmston added: "The new realistic reporting regime does notimpact on our ability or our inclination to sell with-profitspolicies."

4. Revised projection rates for Provident Mutual (PM) andNULAP with-profit funds and the introduction of a guarantee chargeon NULAP policies

The new reporting regime gives greater clarity and thereforemore comfort to policyholders in a financially strong fund. NorwichUnion has assessed the impact of this on its management of itswith-profit funds. In particular we have reviewed the level ofequity backing ratio (EBR), this is the proportion of the fundinvested in shares and property, and whether or not to apply acharge to asset shares towards the cost of policy guarantees in thefunds. Norwich Union has concluded that, where a change isnecessary, it is more in policyholders’ interests to includea charge to asset share rather than further reduce the EBR.Reducing the EBR would lessen the impact of improving stock marketsafter the last few years of poor returns.

CGNU with-profit fund (the main new business fund) &CULAC with-profit fund

  • The financial strength of the fund means there is norequirement to change the EBR from 65% (31 December 2003) or tointroduce a charge on asset share
  • The EBR will not be varied by product type or guaranteetype
  • Projected growth rates will continue at the current FSArecommended levels of 4%, 6%, and 8% (5%, 7% and 9% forpensions)
  • All current new business, and new business generally writtenpost merger of CGU and Norwich Union, is written in thesewith-profit funds.

NUL&P with-profit fund

  • There is a significant build up of valuable policyholderguarantees which are more likely to take effect in the current andforecast low inflation, lower investment return environment
  • We will introduce, from 1 May, a 0.75% per annum charge onasset share towards the cost of policy guarantees. (The need forthe charge and its level will be regularly reviewed in the futurein the light of the financial position of the fund. Any profit onthis charge will be used to enhance future investmentreturns)
  • As a result of introducing the guarantee charge there are noplans to make any material changes to the 52% EBR level (31December 2003)
  • Projection growth rates will be reduced to reflect the loweranticipated overall returns to policyholders, with the mid ratebeing reduced by 1%.

Provident Mutual with-profit fund

  • This fund has a lower EBR than the other funds of 24% (31December 2003). This reflects the relative strength of the fundand the covering of its guarantees
  • We have no plans to introduce a charge on asset share in thenear future
  • Projection growth rates will be reduced to reflect the loweranticipated overall returns to policyholders, with the mid ratebeing reduced by 1.5%.

The summary of the change on mid-rate projection growth rates isas follows:

Mid rate
Mid rate
Life & Savings Products
CGNU/CULAC ( including new business)


6% (unaltered)




Pension Products  
CGNU/CULAC (including new business)%7%(unaltered)

The next phase of mortgage endowment review mailings (summer2004) will be on the revised basis and will include explanations ofthe change.


Press office contacts
James Evans 01904452791 Out of hours 07790 487105
Rob Pell 01904 452659 Out of hours 07968 934091

Notes to editors

  • Norwich Union is the UK's largest insurer. It is the UK'slargest provider of life, pensions and investment products and oneof the leading IFA providers. IFAs provide around 75% of thecompany's long-term savings business in the UK
  • Norwich Union has strategic alliances with building societiesand other leading UK brand names including Tesco Personal Financeand The Royal Bank of Scotland Group
  • Norwich Union’s news releases and a selection of imagesare available from Aviva's internet press centre at

With-profit Realistic Balance Sheet at 31 12 2003(£m)

Total statutory assets12,43910,76125,83349,033
Additional assets on a realistic basis497514381,049
Total realistic assets12,93611,27425,87150,081
Policyholder realistic liabilities10,9789,56523,90944,452
Other liabilities3504085651,323
Total liabilities11,3289,97224,47445,774
Realistic orphan estate1,6081,3021,3984,308
Required capital margin3414288711,640
Realistic basis assets in excess of liability and capitalrequirements1,2668745272,667
RCM cover4.

Figures for Provident Mutual (PM) will be published at the endof 2004 in accordance with FSA guidelines. Only those with-profitsfunds that applied for FSA waivers are required to publish figuresfor 2003 on a realistic basis.

Equity backing ratio

This is the proportion of the with-profit fund invested incompany shares and property. In the longer-term, equity basedassets are likely to provide greater returns than from fixedinterest type assets.

Financial strength allows:

  • Greater investment flexibility
  • A higher EBR with the prospect of greater returns
  • A greater ability to smooth results through the bonusdeclaration.

Principles and Practices of Financial Management documents(PPFM)


  • The FSA is looking to further increase the transparency of themanagement of with-profits through various consultation papers andreviews. The publication of the PPFMs forms part of this
  • Norwich Union will issue individual PPFMs for each of itswith-profit funds: CGNU, CULAC, NUL&P, NULL (Norwich UnionLinked Life), PM (Provident Mutual), Stakeholder with-profit, NUIL(Norwich Union International Limited) and NUL (RBS)
  • The documents will be available for policyholders to view from30 April 2004 from the company website, however the documents arenot intended as "policyholder friendly". FSA consultation paper207 proposes the introduction of "policyholder friendly" versionsavailable from the end of November 2004
  • The PPFM is primarily a governance tool, highlighting thediscretion the board of a company can use in managing with-profitbusiness. It also outlines the responsibilities of the board andthe With-profits Actuary
  • The board has to report on compliance with the PPFM.

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