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Frequently Asked Questions - Scottish Life Fund Bonus Report

Why have I received this statement and what does the statement show?

The bonus statement you have received is issued on an annual basis to customers who hold traditional with profits policies. The statement shows the amount of regular bonus added to your policy for 2009 and the increase in the guaranteed minimum benefits payable from your policy at a specified date or event in the future.

What is a traditional with profits policy?

A traditional with profits policy is a type of investment whose return is indirectly linked to the value of shares and/or bonds. In exchange for paying premiums when due, we guarantee that the policy will pay out no less than the guaranteed amount at the policy's maturity or on specified other events as set out in your policy conditions.

 We invest the premiums and add regular bonuses to the guaranteed amount from time to time to reflect the profits and losses on those investments. We may also pay a final bonus when you take your benefits.
There are two main types of bonus:

  • Regular bonus (also called annual bonus or reversionary bonus) is usually added once a year to the guaranteed benefits and cannot be taken away provided you make no changes to the terms of your policy.

  • Final bonus (also called terminal bonus) may be payable when you take your benefits, based on the rates at that time, but this is not guaranteed.

If you cash in your policy, transfer your policy or stop paying premiums early we may pay you a reduced amount of the bonuses you would have received had you kept your policy until the end of the term. We may also apply other charges to pay out an amount that is fair to you and those remaining in the fund.

Why does my statement show a zero declared bonus amount?

Annual bonus rates are currently low. If the actual amount of bonus is less than one pound then it has been rounded down to zero on your statement. Rest assured that the exact amount of bonus is held on our records and will be taken into account when your policy matures.

How much is my policy currently worth?

Please note that this statement is neither a projected maturity value nor a current valuation should you wish to cash in or transfer your policy. For information relating to either the likely maturity value or surrender/transfer value or for any information relating to previous bonus amounts or statements please call us on 0845 60 50 050.

Why has my regular bonus rate not been increased this year?

Financial markets in the last two years have been exceptionally volatile. 2008 saw some of the worst financial conditions for very many years and the underlying value of virtually all investments fell significantly over the year, the notable exception being gilts. In 2009, we saw strong performance from corporate bonds and equities with poor performance from gilts. We believe that the volatility will continue in 2010. Whilst the financial position of the Scottish Life Fund has improved over 2009, it remains important to limit the build up of guaranteed liabilities, where possible, by limiting the size of regular bonus additions.

It should be noted however that regular bonuses only make up part of the final value of your policy. If the 'fair value' of your policy is greater than the level of guaranteed benefits when your policy matures or becomes a claim then we aim to top-up the payout with final bonus.

What about final bonuses?

Following the volatile investment conditions experienced in 2008 and early 2009 we announced our intention to conduct more frequent reviews of final bonuses and this position has not changed. It still remains the case that we may change final bonuses at any time with the aim of ensuring fairness to all policyholders. Final bonuses will only be added when justified.

We are currently targeting payouts slightly above 100% of asset share and this will be allowed for when we determine final bonuses. As explained in the Annual Update, this is an additional means of equitably distributing the Estate, alongside the 0.7% enhancement to the investment returns credited to your policy in 2009 over and above the return actually achieved on the underlying assets.

Why has my regular bonus rate been relatively low in recent years?

Working capital plays a very important part in managing with profits' business.  It is the amount by which the assets of the fund are greater than the amounts already promised to policyholders. There is a regulatory requirement to hold a certain amount of working capital as a cushion against bad times.  The working capital gives us some additional freedom to invest the assets of the fund in company shares and property with the aim of providing higher growth over the longer term.

After Scottish Life's demutualisation in July 2001, the Scottish Life Fund had significant working capital. As a result the Fund was invested more heavily in equities than had been the case prior to demutualisation. This was consistent with the fund's aim of maximising the long-term return on investments while meeting its guaranteed liabilities. Unfortunately, the working capital then reduced considerably due to the following factors:

  • After the terrorism attacks on 11 September 2001, the equity markets suffered significant losses. As a direct result, the Board decided not to declare an Additional Reversionary Bonus that had been planned for the end of 2001.

  • During 2002 equity markets continued to fall and by the start of 2003, the fund was forced to sell out of equities into bonds to protect its regulatory solvency position. By this stage the equity market had halved in value from its peak.

  • Falling interest rates and the emerging view that people would be living longer in retirement, increased the cost of policyholder guarantees significantly.

As bonus additions increase the amounts promised to policyholders, the regular bonus is being kept low in order to manage the amount of working capital.

Is my plan on track to pay off my mortgage?

We send separate regular updates to mortgage endowment policyholders saying whether or not, under certain assumptions, the endowment is likely to re-pay the mortgage.

My policy has matured/surrendered, am I entitled to more money?

There is no further entitlement as claim payments include interim bonus which allows for regular bonus expected to be added from the date of the last annual bonus to the claim date.

How is The Scottish Life Fund managed?

For information on how we manage The Scottish Life Fund, download the following documents:

  • Principles and Practices of Financial Management (PPFM)
    • Scottish Life PPFM v.7.0 (December 2009) is a detailed technical document which explains how we manage the with profits fund including how our with profits policies work and what benefits you can expect from them.
    • What has changed in v7.0 of the Scottish Life PPFM? - this notification sets out the changes we made to the PPFM in 2009. We have made no changes to the Principles.
  • A guide to how we manage our with profits fund - a plain English guide to the key points of the PPFM. The most recent version (January 2009) is available - please refer to Guide 5 which covers your policy.

  • Directors' report to with profits policyholders on our compliance with the PPFM - the report for 2009 will be published in June 2010.

Contact us

If you would like further information about your policy or your bonus amount, you can call us on 0845 60 50 050 between 8am and 6pm Monday to Friday. We are committed to delivering excellent customer service and so we may record and monitor telephone calls for training and quality control purposes.