Product Specification#

Status: Draft, 2026-08-03 (all cited sources accessed 2026-08-03).

Scope note. This is a standardized composite specification assembled for reference liability cash-flow modeling. It does not describe any single insurer’s product or fund. Facts carrying a source tag — [S#] (primary product/firm documents) and [R#] (regulatory/actuarial references), both numbered per _research/with-profits.md and resolved against sources.md in this directory — were extracted from the cited document. [REG-R#] resolves against the cross-product reference library references/regulatory-and-actuarial-references.md (its own R-numbering; research provenance in _research/regulatory-actuarial.md). Values marked std are standardizations introduced for the reference implementation; each std table row carries a footnote giving the rationale and the observed range across insurers. Facts the research file could not confirm against a retrieved document are flagged unverified. The mechanics anchors are the published PPFMs of three proprietary insurers [S1] [S4] [S5]; the with-profits fund documented in the first of these is called the anchor fund below. The modern smoothed-fund variation is anchored to the PruFund PPFM, customer guide and policy provisions [S2] [S9] [S11].

Product overview and market role#

With-profits business is participating long-term insurance in which premiums are pooled in a with-profits fund and policy payouts combine guaranteed benefits with discretionary bonuses. Two bonus types are universal: regular (annual/reversionary) bonuses, which increase guaranteed benefits and become a contractual right only once added, and a final (terminal) bonus payable at claim [S1]. The fairness benchmark for payouts is the asset share — a retrospective accumulation, per policy or specimen policy, of premiums and investment return less expenses, tax, risk and guarantee charges and shareholder transfers [S1] [S4] R8. The exercise of discretion is governed by each firm’s published Principles and Practices of Financial Management (PPFM) R2, with FCA conduct rules setting target-range, smoothing and market value reduction (MVR) constraints R1 and a With-Profits Committee and With-Profits Actuary overseeing the discretion R4 R5.

Three liability chassis coexist in the UK market [S1] [S4]: (a) conventional (traditional) with-profits — a basic sum assured (the minimum maturity amount) to which declared bonuses are added [S1]; (b) unitised (accumulating) with-profits — premiums buy units whose price rises with declared regular bonuses, with a final bonus at encashment and MVR machinery on non-guaranteed exits [S1] [S4]; and (c) smoothed funds (PruFund-style) — no bonus declarations; the unit price grows daily at a published Expected Growth Rate with rule-based adjustments toward the unsmoothed net asset value [S2] [S9] [S11]. Under the Regulated Activities Order, conventional with-profits assurances and annuities fall in Class I (life and annuity), with unitised/linked structures typically involving Class III R9; per-product allocation unverified.

Most conventional and unitised with-profits funds are legacy books: one consolidator alone runs 18 internally segregated funds inherited from many acquired offices [S4], and most UK conventional funds are closed to new business [unverified as a market-wide statement]. Documented open with-profits business today comprises smoothed funds (the PruFund range, currently marketed [S10] [S13]), mutuals (one with an open fund [S7], another distributing profits annually [S6]), friendly societies (with-profits ISAs [S12]) and new niche forms (credit-matched with-profits, added 2026 [S1] [S3]).

This specification standardizes a single composite: a proprietary 90:10 with-profits fund carrying two product chassis — a unitised with-profits bond (primary cell, representative of the largest open/recently-open retail block) and a conventional with-profits endowment (legacy cell) — with the PruFund-style smoothed fund and the mutual profit-distribution model described as variations.

Representative specification#

Fund structure and profit sharing#

Parameter	Representative value	Basis
Fund type	Proprietary with-profits sub-fund within a long-term fund; ring-fenced	[S1] R6; choice std (1)
Profit sharing basis	90:10 — at least 90% of divisible profit distributed to policyholders, balance to shareholders	[S1] [S8]
Shareholder transfer	10% of each distribution = one-ninth of the cost of bonus declared/paid; charged to asset shares	equivalence and charging std (2); components [S1] [S5] [S8] R1
Distribution floor	Policyholder share not less than the “required percentage”; shareholder transfers reduced proportionately if adjustments (MVRs, bonus cuts) reduce policyholder distributions below the required percentage	R1
Estate (inherited estate)	Residual working capital of the fund; supports smoothing, guarantees and investment freedom; no distribution expectation in the base model	[S1]; base-model treatment std (3)
New business status of composite	Conventional cell closed; unitised and smoothed cells open	[S4] [S10] [S13]; composite std (4)

Footnotes to std rows:

Proprietary 90:10 is the representative historical design: the anchor fund distributes at least 90% of divisible profit to policyholders [S1]; at another proprietary insurer shareholders currently receive 10% of distributed surplus [S5]; the consumer statement is “up to 10%” to shareholders [S8]. Variants observed: 100:0 classes and defined-charge (DCPSF) structures in the anchor fund’s own long-term fund [S1] [S2]; two mutuals with no shareholder [S6] [S7]. That 90:10 is the typical proprietary basis generally is unverified; the COBS 20.2.17R “required percentage” floor was not separately captured R1 note.
One-ninth is the arithmetic restatement of 90:10 — if policyholders receive a bonus cost of 90 units, shareholders receive 10 = 90/9. Charging the transfer to asset shares follows one insurer’s documented practice [S5] and the PRA retrospective asset-share item list R8. The measurement basis for “cost of bonus” varies by firm and is not fully recorded in the retrieved PPFMs; the reference measurement is defined in technical-notes.md as std.
Observed estate behavior ranges from no-distribution working capital (the anchor fund [S1]) to active distribution (reattribution special bonuses at another proprietary insurer [S5]; an annual mutual profit distribution [S6]; excess-surplus unit price enhancements in the anchor fund [S1] [S2]) and estate-floor triggers (one consolidated closed fund’s estate ≥0.5% of aggregate asset shares [S4]). The base model holds the estate as a residual with no scheduled distribution; COBS 20.2.21R requires at least annual excess-surplus determination R1.
Mirrors the market split: consolidated closed conventional books [S4] [S5] against currently marketed unitised/smoothed business [S10] [S12] [S13].

Chassis A — unitised with-profits bond (primary cell)#

Parameter	Representative value	Basis
Product form	Single-premium, whole-of-life unitised with-profits investment bond	[S4] [S10]; choice std (5)
Issue ages (lives assured)	3 months to 85 (age next birthday) at outset	[S10]; adoption std (6)
Minimum premium	£10,000 single premium; top-ups permitted (minimum £10,000)	[S10]; adoption std (6)
Premium allocation rate	100% of premium buys units	proportion-less-charges design [S4]; 100% std (7)
Regular bonus delivery	Unit price increases daily at the equivalent of the declared annual rate; unit price never falls (declared bonus ≥ 0)	[S1] [S4]
Snapshot regular bonus rate	2.00% p.a.	std (8)
Annual management charge (AMC)	1.00% p.a. of asset share, deducted from credited return	percentage-of-asset-share application [S5]; rate std (9)
Guarantee/smoothing charge	0.10% p.a. of asset share, deducted from credited return; lifetime cumulative deduction capped at 2% of asset shares	cap [S1]; annual rate std (10)
Death benefit	101% of (unit face value plus any final bonus); MVR never applies on death	101% std (11); no-MVR-on-death [S5]
MVR-free guarantee date	10th policy anniversary (full encashment free of MVR)	[S4]; single-date choice std (12)
MVR-free regular withdrawals	Up to 5% p.a. of the original premium	std (13)
Surrender benefit	Unit face value + final bonus − MVR (see Contractual mechanics)	[S1] [S4] [S5] R1
Anchor model cell	£25,000 single premium, male, age 55 at entry, units purchased at £1.0000	std (14)

Single-premium whole-of-life bonds with guarantee dates are the documented unitised retail shape (one consolidator: “single-premium bonds: whole-of-life; some have guarantee dates at which encashment is MVR-free” [S4]); the currently marketed retail bond is the same wrapper on PruFund [S10]. A regular-premium unitised endowment/pension is the same recursion with a premium vector (supported by the technical notes).
Adopted from the currently marketed retail bond [S10] — the only such limits retrieved; closed-book originals are unpublished (research gap 4).
PPFMs state that “a proportion of each premium less charges” buys units [S4] without publishing allocation rates; 100% allocation with explicit AMC is the cleanest composite and matches modern single-premium practice [S10 charges structure].
Current declared bonus rates are not collected in the research file (they live in annual bonus declarations, not PPFMs — research gap 3). 2.00% is a pure modeling snapshot chosen below the composite fund-return assumption (5.0% p.a., technical notes) so that a substantial final-bonus proportion emerges, per the PPFM bonus philosophy [S1].
Observed levels: 1% p.a. expense-charge cap on many pension contracts in the anchor fund since April 2001 [S1]; a 1% p.a. total charge restriction for certain pre-Dec-2000 unitised business at another proprietary insurer [S5]. Modern PruFund bonds charge less (0.30%–0.575% tiered AMC [S10]); 1.00% is representative of the legacy unitised block.
The anchor fund caps the total lifetime guarantee/smoothing deduction for most traditional WP policies at 2% of asset shares, built up gradually (4% for post-March-2019 AVCs) [S1]. Other observed forms: a 0.7% p.a. unit charge for the first 10 years on certain products [S5]; conditional deficit-triggered charges capped at 10%/25% of asset shares in one consolidated closed fund [S4]; a charging ladder of 1.0% p.a. with a 7.0% lifetime cap in another [S4]; a charge taken by deduction or reduced credited return at a mutual [S6]. A level 0.10% p.a. against the [S1] 2% lifetime cap is the composite.
Observed death benefits: 100.1% of bid value of units (the currently marketed retail bond) [S10] [S11]; 101% guarantee on net money paid in (a friendly society’s with-profits ISA) [S12]. 101% of unit face value is adopted as the round composite.
Observed MVR-free points: contractual guarantee dates varying by tranche, with no (or limited) MVR at the 10th policy anniversary for with-profits bonds in one consolidated fund [S4]; MVR-free guarantee periods in the anchor fund [S1]; policy-condition dates at another proprietary insurer [S5]; one mutual tapers the MVR to zero at selected retirement date [S7]. A single 10th-anniversary guarantee date is the minimal composite.
Taken from one consolidator (“some policies allow small regular encashments MVR-free” [S4]) and sized to the familiar 5% p.a. tax-deferred withdrawal allowance for UK bonds [S10] REG-R15. The 5% MVR-free level itself is a standardization.
Pure modeling choice; used in the technical-notes worked example (year-6 state: asset share £30,000, unit price £1.104081 after five 2.00% declarations).

Chassis B — conventional with-profits endowment (legacy cell)#

Parameter	Representative value	Basis
Product form	Regular-premium with-profits endowment assurance, closed to new business	[S1] [S4] [S8]; anchor std (15)
Term / anchor cell	25 years; male, age 35 at entry	std (15)
Basic sum assured (SA)	£20,000 — the minimum maturity amount before bonuses	role [S1]; amount std (15)
Premium	£60 per month, level, payable throughout the term	std (15)
Reversionary bonus form	Compound: declared rate applied to SA + attaching bonuses	form unverified convention; choice std (16)
Snapshot reversionary bonus rate	1.50% p.a. compound	std (16)
Bonus hardening	A regular bonus becomes a contractual right only once added; guaranteed at maturity and death only	[S1] [S8]
Interim bonus	Claims between declarations accrue interim bonus at the last declared rate	practice [S1] [S7]; rate equality std (17)
Death benefit	SA + attaching reversionary bonuses + interim bonus + any final bonus	[S4] [S8]
Maturity benefit	SA + attaching reversionary bonuses + terminal bonus	[S1] [S4] [S8]
Terminal bonus	max(0, smoothed target payout − guaranteed benefit) at claim	principle [S1] [S4]; formalization std (18)
Surrender value	Formula-based on SA + bonuses, parameters reviewed annually to target asset shares	[S1] [S5]; parametrization std (19)

Original conventional policy conditions (issue-age ranges, premium tables) are not republished for closed books — a recorded research gap (gap 4). The 25-year endowment on a 35-year-old male with SA £20,000 and £60/month is a pure modeling anchor shaped like the classic mortgage-endowment sale; the premium level is not a priced value.
The retrieved PPFMs describe bonus additions generically; explicit compound/super-compound classification per product was not found and is flagged unverified in the research file (which records that UK conventional bonuses are commonly compound or super-compound as an unverified convention). Compound form is chosen as the simpler standard; the rate 1.50% is a snapshot standardization (bonus declarations not collected — research gap 3).
Interim bonus rates are set as the best estimate of the next declaration (one mutual sets them annually [S7]; the anchor fund applies interim rates between declaration and claim [S1]); equating the interim rate to the last declared rate is the modeling simplification.
The anchor fund sets final bonus by reference to asset shares of sample policies subject to smoothing [S1]; one consolidator pays guaranteed benefits plus any final bonus [S4]. The max(0, ·) formalization makes the guarantee floor explicit.
In the anchor fund, conventional surrender values are formula-based with parameters set to broadly target asset shares over the long term, based on sum assured, regular bonus and final bonus, reviewed normally annually [S1]; another proprietary insurer reviews surrender bases when market indicators move 5% [S5]. The reference parametrization (clamped asset-share targeting) is defined in technical-notes.md.

Bonus framework (both chassis)#

Parameter	Representative value	Basis
Declaration frequency	Annual, for the forthcoming bonus year; final bonus scales normally reviewed yearly, ad hoc reviews after large market moves	[S1] [S4] [S5]
Regular bonus change discipline	Changes not expected to exceed ±1.00% p.a. in normal circumstances; zero declaration permitted; no limit where policyholder protection requires	[S1]; cross-firm adoption std (20)
Bonus philosophy	Keep a substantial proportion of payout in non-guaranteed (final bonus) form; reference guarantee-fill target θ = 80% of projected asset share	philosophy [S1]; θ std (21)
Final bonus scale scope	Same scale applies at maturity, death and surrender	[S1]

Observed change limits: “not expected to exceed 1% p.a.” with full discretion to declare zero in the anchor fund [S1]; 1% compound y/y (traditional), 1.25%/1.5% (unitised, by product) at a mutual [S7]. ±1.00% adopted for both chassis.
PPFMs state the philosophy qualitatively [S1] but publish no guarantee-fill parameter. θ = 80% (regular-bonus path aims for guaranteed benefits ≈ 80% of the projected maturity asset share, leaving ≈ 20% as final bonus) is the reference parametrization; see technical notes for the bonus-setting rule.

Payout targets, smoothing and MVR#

Parameter	Representative value	Basis
Payout target	100% of unsmoothed asset share on average	[S5] [S7] [S8]; range must include 100% R1
Target range	80%–120% of asset share, with the aim that ≥90% of policies pay within the range	[S1]; ≥90% test structure R1; adoption std (22)
Year-on-year smoothing cap	Payouts for the same class and duration normally change by no more than ±10% y/y	[S1]; adoption std (23)
Smoothing cost	Tracked in a smoothing account within the estate; intended broadly neutral over time	[S1] [S2] [S5] [S6]; PPFM expected to state neutrality intent (COBS 20.3.8G guidance) R2
MVR trigger	Exit outside MVR-free events while unit face value (incl. attached bonuses) exceeds the asset share	[S1] [S4] [S5] [S6]
MVR bound	MVR no greater than necessary to reflect the excess of unit value over the underlying asset value	R1 COBS 20.2.16R; post-MVR payouts target 100% of asset share [S5]
Final bonus / MVR interaction	Never applied simultaneously to the same policy	[S4]; adoption std (24)

Observed maturity target ranges: 80–120% (the anchor fund, aim ≥90% of policies within [S1]; a consolidator’s typical funds, before smoothing [S4]; another proprietary insurer’s group payouts [S5]); 80–130% conventional / 75–125% unitised (one mutual [S6]); 75–125% / 85–111% / 80–120% by product (another mutual [S7]). 80–120% with the ≥90% test is the modal design and matches the COBS structure (range must include 100% of unsmoothed asset share; payments may fall outside if ≥90% of the group is within) R1.
Observed smoothing formulations: ±10% y/y in normal circumstances in the anchor fund, smoothed vs unsmoothed value rarely >20% apart [S1] [S8]; stepped 5%/7.5% limits with a 15% annual maximum and a smoothing account recycled at year-end (maximum deduction 2.5% of asset shares p.a.) at another proprietary insurer [S5]; ≤15% y/y with hard floor/cap at the range edges at one mutual [S7]; formulaic pull-to-asset-share with no fixed maximum at another mutual [S6]. The ±10% cap plus a cost-neutral smoothing account is the most transferable abstraction.
In one consolidated with-profits fund, final bonus and MVR do not apply simultaneously to any policy class; in some other funds they may [S4]. Exclusivity is adopted because it follows automatically from the reference one-sided formulas (technical notes).

Modern open variation — PruFund-style smoothed fund#

Parameter	Representative value	Basis
Bonus mechanism	None. Unit price grows daily at the Expected Growth Rate (EGR), an annualised rate (can be negative) set quarterly by the Board from expected long-term returns	[S2] [S11]
Snapshot EGR	5.0% p.a.	std (25)
Daily smoothing rule	If spot NAV/unit AND the 5-working-day rolling average NAV/unit differ from the smoothed price by ≥ the Daily Smoothing Limit, the price is immediately adjusted to within the Gap After Adjustment	[S2] [S9] [S11]
Quarterly smoothing rule	On each quarter date, while the gap between NAV per unit and the price is ≥ the Quarterly Smoothing Limit, the price is moved by half the difference, repeatedly	[S2] [S9] [S11]
Smoothing limits (growth funds)	Daily 5.0% / Quarterly 10.0% / Gap After Adjustment 2.5% of unsmoothed price	[S9]
Smoothing limits (cautious and Risk Managed 1–2 funds)	4.0% / 8.0% / 2.0%	[S9]
Protective machinery	Unit Price Reset to NAV; suspension of smoothing (price tracks NAV); unit cancellations on switches/transfers/withdrawals may be deferred up to 28 days (day-28 price applies)	[S2] [S10] [S11]
Charges	Tiered AMC 0.30%–0.575% by fund size; guarantee/smoothing charge typically within the AMC	[S10] [S2]
Death benefit	100.1% of the bid value of units	[S10] [S11]
Optional guarantees	Minimum fund value at chosen guarantee dates for an annual charge taken by unit cancellation	[S10]

EGRs are set quarterly and published per fund [S2]; current EGR values were not collected (research gap 3). 5.0% p.a. matches the composite fund-return assumption in the technical notes so the smoothed and unsmoothed paths coincide in the base deterministic scenario.

Ownership variation — mutual profit distribution#

Parameter	Representative value	Basis
Shareholder transfer	None (mutual)	[S6] [S7]
Distribution mechanism	Annual discretionary profit distribution from the Estate (may be zero): extra regular bonus plus asset-share enhancement for conventional/unitised WP; bonus units for unit-linked WP	[S6]
Relative rate	CWP/UWP distribution rate = 8× the unit-linked WP rate for pre-2022 policies; multiple variable (independent actuarial advice required below 6 or above 10)	[S6]
Estate protection	The distribution may be reduced to zero and asset-share charges introduced if the Estate becomes too low	[S6]

The base model sets the mutual distribution to zero (proprietary composite); the mutual variation replaces the shareholder-transfer deduction with an optional profit-distribution addition.

Contractual mechanics#

Unitised account and bonus hardening. The policy account is FV(t) = U(t) · Q(t), where U(t) is units held and Q(t) the with-profits unit price. The declared regular bonus b(t) ≥ 0 is delivered through unit-price growth, Q(t) = Q(t−1) · (1 + b(t)) [S1] [S4]. The unit price never falls; once added, bonus (unit-price growth) cannot be removed — but the face value is payable in full only at guarantee events. Guarantees bite at death, at maturity (where a term applies) and at contractual MVR-free guarantee dates [S1] [S4] [S5].

Unitised claim values. At a guarantee event the payout is FV(t) + FB(t) with final bonus FB(t) = max(0, S(t) − FV(t)), where S(t) is the smoothed target payout derived from the asset share (technical notes). On surrender outside guarantee events the payout is FV(t) + FB(t) − MVR(t) with MVR(t) = min( max(0, FV(t) − S(t)), max(0, FV(t) − AS(t)) ): the MVR recovers the shortfall of the smoothed payout below face value but may never exceed the excess of unit value over the underlying asset share R1 COBS 20.2.16R, and post-MVR payouts target 100% of asset share [S5]. This one-sided pair reproduces the observed practice that the MVR reduces final bonus first, then unit face value [S5], and that final bonus and MVR do not apply simultaneously [S4]. On partial withdrawal, the asset share is reduced pro rata to the pre-MVR policy value [S1].

Conventional guaranteed benefit stack. With compound reversionary bonuses at rate b_rev(t), the guaranteed benefit G(t) = SA + attaching bonuses evolves as G(t) = G(t−1) · (1 + b_rev(t)), G(0) = SA std (16). G(t) is payable at death or maturity only [S1] [S8]; surrender values are not guaranteed. The maturity payout is G(n) + TB(n) with terminal bonus TB(n) = max(0, S(n) − G(n)) (18); the death payout during the term is G(t) plus interim bonus accrual at the last declared rate plus final bonus per the same scale [S1] [S4] [S8].

Conventional surrender value. Formula-based, targeting asset shares over the long term with parameters reviewed at least annually [S1]: the reference form is SV(t) = clamp( AS(t), 0.85 · PV_g(t), 1.15 · PV_g(t) ), where PV_g(t) = G(t) · (1 + i_sv)^−(n−t) is the discounted guaranteed benefit at the surrender-basis rate i_sv = 4.0% std (19). Surrender payouts progress into maturity values near the term end [S1]; no formal smoothing applies to surrenders [S5] [S6].

Deferred annuity note. Conventional with-profits deferred annuities carry a basic annuity p.a. plus bonuses; cash claims reflect the current cost of the deferred annuity [S1]. Out of scope for the composite cells but relevant to the GAO rider below.

Smoothed-fund (PruFund) contractual smoothing. The policy conditions define the Expected Growth Rate, Daily Smoothing Limit, Quarterly Smoothing Limit and Gap After Adjustment as contractual terms [S11]. Daily: if both the spot NAV per unit and the 5-working-day average breach the Daily Smoothing Limit relative to the smoothed price, the price is adjusted to the Gap After Adjustment; quarterly: while the gap is ≥ the Quarterly Smoothing Limit the price moves by half the difference, repeatedly [S9] [S11]. The insurer may reset the unit price to NAV or suspend smoothing to protect the fund [S2] [S11]. Pay-out value = units held × unit price, less policy-condition deductions, at the transaction date [S2].

Riders and options#

In scope (modeled as flags):

Guaranteed annuity option (GAO) — legacy pension cells only. A guaranteed rate of annuity conversion at retirement, present in several closed funds (deferred annuities and retirement annuity contracts in one acquired book; unit-linked GAO risk in another); GAO liabilities are backed by fixed-interest assets and GAO interest-rate risk is an identified fund business risk [S4]. Historical market significance (a major UK office’s closure in 2000 after the House of Lords ruling on GAO costs) is unverified context. Parametrized in the technical notes as a flag with a std guaranteed annuity rate.
Guarantee-date capital guarantees (smoothed-fund variation) — optional minimum fund value at chosen guarantee dates for an explicit annual charge taken by unit cancellation [S10].

Out of scope for the composite: with-profits annuities (smoothing caps 11–12% on income rises [S1]); credit-matched with-profits (guaranteed benefit at outset, prospective asset shares [S1] [S3]); cash accumulation business (bonuses added to contributions; regular bonus guaranteed to the next revision date [S1]); unit-linked with-profits (bonus units, no asset shares or smoothing [S6]); deposit administration [S6]; Industrial Branch business [S1]; return-of-premium death guarantees on modern bonds [S10]; protection riders (waiver, critical illness) — original conventional policy conditions are unpublished (research gap 4).

Variations across insurers#

Chassis split. Conventional (sum assured + declared bonus stack, formulaic surrender values [S1] [S4] [S8]), unitised (unit account, bonus-driven price growth or bonus units, MVR machinery [S4] [S5] [S6] [S7]) and smoothed funds (EGR + rule-based price adjustment, no declarations [S2] [S9] [S11]). The composite models (a) and (b) as core chassis and (c) as the open-business variation because that is where the respective blocks of UK liability sit [S4] [S10] [S13].
Target ranges. All firms target 100% of asset share on average, but ranges differ: 80–120% (three proprietary funds [S1] [S4] [S5]); 80–130%/75–125% (one mutual [S6]); 75–125%, 85–111%, 80–120% by product (another mutual [S7]). 80–120% with the ≥90%-of-policies test is chosen as modal and as the direct implementation of the COBS structure R1.
Smoothing formulation varies more than any other feature: y/y payout caps (10% in the anchor fund [S1]; 15% at one mutual [S7]; stepped 5%/7.5% with a 15% annual max at another proprietary insurer [S5]), explicit smoothing accounts recycled to asset shares (maximum deduction 2.5% p.a. [S5]; bonus smoothing accounts within the Estate in the anchor fund [S1] [S2]), or pure formulaic pull-to-asset-share with no stated cap (another mutual [S6]). Chosen: ±10% cap plus a neutral smoothing account — the most transferable abstraction.
MVR triggers. Shortfall-based (three proprietary funds [S1] [S4] [S5] — all capped at the asset-value shortfall per COBS 20.2.16R R1); explicit numeric trigger/taper (one mutual: MVR when asset share <90% of unit value, linear smoothing-in between 85% and 90%, taper to zero over 3 years to retirement [S7]). MVR-free events are universal: death [S5], contractual guarantee dates [S1] [S4] [S5], frequently the 10th anniversary for bonds [S4]. Chosen: the shortfall-capped form — it is the regulatory bound itself.
Ownership/distribution. Proprietary 90:10 (the anchor fund [S1]; another proprietary insurer, transfer charged to asset shares [S5]) vs mutual (an annual profit distribution at an 8× multiple [S6]; another mutual [S7]) vs defined-charge (a DCPSF alongside the anchor fund in the same long-term fund: explicit charges only, shareholder bears expense differences [S1] [S2]). Chosen: 90:10 proprietary as the representative historical design, with the mutual variation specified separately.
Guarantee charging. Lifetime caps as % of asset share (2%/4% in the anchor fund [S1]), time-limited unit charges (0.7% × 10 years [S5]), conditional deficit-triggered charges (10%/25% caps, reversible, in one consolidated closed fund [S4]; a 1% p.a./7% lifetime ladder in another [S4]), or annual deductions from credited return (with-profits annuities in the anchor fund [S1]; an option at a mutual [S6]). Chosen: a level annual deduction with the [S1] 2% lifetime cap — a configurable single dial.
Estate handling. From pure working capital (the anchor fund [S1]) to reattribution with special bonuses (a 2009 scheme backed by an external inherited-estate support account [S5]), an annual mutual profit distribution [S6] and estate-floor triggers (a consolidator [S4]). Chosen: residual estate, no distribution — the least model-intrusive and the stance documented for the anchor fund [S1].

Regulatory context#

Prudential — PRA / Solvency UK. With-profits funds are ring-fenced: a firm must hold assets in each with-profits fund sufficient to cover the with-profits policy liabilities of the business written in or transferred into that fund, and its distribution strategy for discretionary benefits must be affordable and sustainable R6. Technical provisions are best estimate plus risk margin; the best estimate must include all expected payments to policyholders “whether or not … contractually guaranteed” — the basis for including future discretionary benefits (FDB) in the BEL — with a carve-out for surplus funds (the estate, which counts as own funds rather than insurance obligations) R7 R8. Financial guarantees and options must be valued with realistic, dynamic policyholder-behavior assumptions R7. The PRA Surplus Funds Part codifies the retrospective asset-share item list used throughout this specification R8. The post-2023/24 “Solvency UK” risk margin uses a 4% cost-of-capital rate with a 0.9 risk-tapering factor for long-term business R7 REG-R4.

Conduct — FCA. COBS 20.2 requires maturity-payment target ranges expressed as percentages of unsmoothed asset share that include 100%, a ≥90%-within-range test, the MVR shortfall bound, the required-percentage distribution floor with proportionate shareholder-transfer reduction, at-least-annual excess surplus determination, new business only on terms unlikely to adversely affect existing policyholders, and a run-off plan within three months of closing to material new with-profits business R1. COBS 20.3 requires a maintained PPFM covering amounts payable, bonus approach, smoothing limits, investment strategy, business risk, charges, the inherited estate, new business volumes and shareholder equity R2; COBS 20.4 requires PPFM provision to policyholders, three months’ notice of principle changes and an annual PPFM-compliance report R3; COBS 20.5 requires a With-Profits Committee (≥3 members, expected to meet at least quarterly) — or, for smaller/simpler funds, an advisory arrangement — advising on bonus rates, smoothing and MVRs R4. SUP 4.3 defines the With-Profits Actuary function, including advising whether the FDB assumptions in technical provisions are consistent with the PPFM R5. The Consumer Duty applies to retail with-profits business (Principles 6/7 disapplied where it applies) REG-R12.

Professional standards. With-Profits Actuaries must hold a practising certificate and manage conflicts under IFoA APS L1, which also requires oversight of asset-share calculation where it is not the WPA’s direct responsibility R12. Technical actuarial work on with-profits reserving falls under FRC TAS 100 (v2.0, effective 1 July 2023 REG-R33) and TAS 200: Insurance (v2.0, effective 1 January 2025) R11.

Tax. With-profits life business is BLAGAB under Finance Act 2012 Part 2, taxed on the I-E basis — policyholder-level tax is effectively borne inside the fund, and asset shares are charged tax accordingly (pensions business is credited gross returns) [S1] [S2] REG-R17 REG-R18. Policyholder taxation of with-profits bonds follows the chargeable event gains regime (ITTOIA 2005 Part 4 Chapter 9): part surrenders within the cumulative 5%-of-premium annual allowance are not immediately taxable, shaping withdrawal behavior REG-R15 REG-R16. With-profits ISA wrappers carry the £20,000 annual subscription limit [S12]. Classification: conventional with-profits assurances and annuities are Class I long-term business under the RAO; unitised/linked structures typically involve Class III R9; per-product allocation unverified.