Section 4.2 ch20 pg 14 states: "...the difference between product charges and expenses accrues either in the WP estate or outside the WP fund (thereby forming the shareholder transfer." In the case of the former, does this mean that no surplus is transferred to the shareholders? The surplus is being retained within the WP fund (in the estate) for whatever reason (cost of guarantees, investment freedom etc.) so how do the shareholders benefit from this arrangement? In the case of the latter, does it mean that 100% (0/100 fund) of this expense surplus forms the shareholder transfer? The next page states: "Some companies still determine shareholder transfers on a 90/10 basis...in which case charges less expenses need to cover these transfers." I'm assuming that this relates to point 2 above? In this case, does only 10% of the expense surplus go towards shareholder transfers (which means that policyholders receive all the investment surplus PLUS 90% of the expense surplus)?
Hi The "normal" (certainly the most transparent) arrangement would be, if the business is written on a 0/100 basis, for any difference between product charges and expenses to accrue outside the WP fund. In this case, these differences form the shareholder transfer (from the WP fund to the shareholder fund). In this case, yes, this does mean that 100% of this expense surplus forms the shareholder transfer. The other alternative mentioned is, I think, a less transparent mechanism for determining the shareholder transfers. So, yes in this case the expense surplus would be retained (initially at least) in the WP fund. There would then need to be some separate defined mechanism for determining the shareholder transfers. The combination of the level of the charges and the means of determining the transfer would be intended to combine to achieve the correct apportionment of surpluses between policyholders and shareholders. Best wishes Lynn
Hi What this sentence ("Some companies still determine...") means is that some UWP business may be written on a 90/10 basis (i.e. with shareholders receiving transfers equal to 1/9 of the cost of bonus) but with the asset shares having charges deducted from them rather than actual expenses. Remember that, for many companies, "shareholder transfers" are one of the deductions made from asset shares that are written on a 90/10 basis (see Chapter 20 Section 3.7). The charges taken from the UWP asset shares should therefore be sufficient to cover not just the expenses incurred, but any other deductions required from asset share (e.g. charges to cover the cost of guarantees), including the shareholder transfer deductions - unless these are deducted separately (or taken from the estate rather than from asset shares). Hope that helps.
Ok, I think I understand now. So, just to confirm, there are actually 3 possibilities in UWP: 0/100 funds which have explicit charging structures (e.g. Policy fee, risk benefit charge etc). In this case, these product charges are deducted from asset shares (including the risk benefit charge, which must be sufficient to cover the cost of providing life cover). Any expense surplus either forms the shareholder transfers or falls to the estate (and here, shareholder transfers aren't deducted from the asset share) 90/10 funds with no explicit charging structures. Here, actual expenses are charged to asset shares and shareholder transfers (equal to 1/9th of the bonus cost) are deducted from asset share (or in special cases, rather charged to the estate). 90/10 funds with an explicit charging structure (e.g. Policy fee, risk benefit charge etc) - this is what you touched on above (?) Here, these product charges are deducted from asset shares (similarly to the first point). These charges must cover (as you mentioned) expenses, cost of life cover, cost of guarantees. In this case, any excess of product charges over actual expenses are credited back to asset shares. If shareholder transfers are deducted from the asset share (1/9th of bonus cost), then any bonus declarations will "automatically" be distributing 90% of the surplus to policyholders If shareholder transfers are not deducted, then the product charges above need to cover the cost of shareholder transfers as well so that any excess over actuals credited back produce a lower amount of surplus credited back (relative to previous point) Have I understood this correctly?
Hi - yes that broadly sounds correct, although bear in mind under the third variation that only the excess of {product charges which are designed to meet expenses} over expenses should be credited back, in order for the policyholders to share in the expense surplus. Some of the product charges may be designed to meet other purposes, e.g. cost of guarantees. The company would not want to credit back those elements to asset shares, as those charges need to accrue to the estate in order for the estate to meet those actual costs when needed. It is also the case that not all companies would necessarily credit back the difference between charges and expenses on a regular basis under the third variation. They may decide to let this difference fall to the estate, particularly if it is expected to be broadly neutral over time. In some circumstances, the company might intentionally charge a lower amount to the asset share than the actual expected expense level, with the estate (or even shareholders) picking up the shortfall. This is done in order to treat policyholders fairly, for example in the situation where per policy expenses are expected to increase within a closed fund due to spreading fixed costs over a declining number of policies (as mentioned in Chapter 22).
