# Hibernian With Profits Charter



## Brendan Burgess (28 Nov 2002)

Hibernian have today launched a Charter for With Profits policyholders - i have cut and pasted this from a PDF document, so sorry about the formatting:

*Text of Press Release:
25 November 2002


HIBERNIAN INTRODUCES ITS ‘WITH PROFIT CHARTER’

As a result of recent stock market uncertainties and as part of several efforts to reassure both present and prospective with profit customers Hibernian Life & Pensions has taken the initiative to launch a With Profit Charter – a first for a life and pensions company in Ireland.

“With Profit business has had some bad press in recent months” said Grant Barrans Managing Director of Hibernian Life & Pensions. “Stock market volatility and an uncertain economic future have meant that all investment products have experienced difficult times, and with profit funds have been no exception. The Charter is a way of setting in stone the commitment we make to our customers when they choose Hibernian to manage their money.”

The With Profit business is not as straightforward as other investment opportunities; its main advantage over other methods of savings is that it provides investors with the benefits of smoothing, together with valuable capital guarantees. Because customers’ money is invested in a wide range of assets including stocks and shares, but also in more stable options such as property, government bonds and cash, it means that the risk is not as high as it would be if the money was invested one hundred per cent in stocks and shares. 

“In a nutshell a With Profit investment product is a way of putting into practice that old adage of not putting all your eggs in one basket - and in today’s economic climate that’s not such a bad idea” said Grant Barrans.  

The Charter specifically outlines how Hibernian’s bonus is paid and how the With Profit ‘smoothing’ process works. Smoothing is probably the key area where With Profit products are different to more straightforward investment products. The performance of assets underlying any investment can have good years and bad. The difference in a With Profit fund is that the ups and downs are smoothed out, some of the gains in the good years are held back to compensate for years in which the fund is not doing too well. The Hibernian Charter clearly explains how the smoothing process works, and emphasises that all the returns are paid out in the long term. It also sets out the company’s principles regarding application of a Market Value Adjustment (MVA), which protects those in the fund from a stream of early encashments under poor market circumstances. 

The Charter also guarantees that the With Profit fund is independent of all other Hibernian Life & Pensions business activity, i.e. it is ring fenced so that policyholders are not exposed to any business risks that the company may in the future be exposed to. There is also a commitment to disclose the Free Asset Ratio of the fund each six months in June and December. This ratio shows by how much the assets of the fund exceed its liabilities and is a good indicator of the financial strength of the fund, over and above the solvency margin required by government legislation. Indeed the assets of the Hibernian With Profit Fund are well in excess of these strict government margins. The Free Asset Ratio is also an essential indicator for the financial adviser to assess if the fund is sound and if it is a safe recommendation for his or her clients.

Grant Barrans said: “I am certain that there are many policyholders and prospective policyholders out there who have perhaps been worried, not only by the recent bad press surrounding With Profit funds, but also by the continuing economic downturn. This Charter underscores the fact that prudent management of Hibernian’s With Profit Fund means that future Hibernian With Profit policyholders will not pay for the poor investment performance of the recent past. I believe this is an important message to get across to customers”.
*

*Principles of the Hibernian
Unitised With Profit Fund*
These principles are supervised by the Appointed
Actuary, a senior employee of Hibernian Life &
Pensions, who has a professional and legal
responsibility to ensure that policyholders are treated
equitably and fairly.
Investment management
1. Policyholders’ money is invested in the Hibernian
With Profit Fund. To reduce risk the fund invests in
a wide range of assets including stocks and shares,
fixed interest securities such as Government bonds,
property and cash. By investing in a wide range of
countries the risk is further reduced. Hibernian
decides how the fund is apportioned between the
different asset classes. However the proportion of
each asset will normally remain between the
following parameters:
Stocks & shares 40% - 80%
Bonds 20% - 60%
Property 0% - 20%
Cash 0% - 20%
2. The investment strategy for the With Profit Fund is
to maximise investment returns for policyholders,
subject to an acceptable level of risk, whilst
maintaining a broad spread of assets.
3. Hibernian will not invest any of the assets of the
With Profit Fund in wholly or partially owned
subsidiary undertakings of Hibernian Life &
Pensions Ltd.
4. At the end of June and December of each year,
Hibernian will publish the exact asset split. This
information will be posted on the Hibernian Life &
Pensions website at www.hibernian.ie

5. The investment strategy of the With Profit Fund can
vary according to the broad level of guarantees in
individual products. A product with higher levels of
guarantees may be more conservatively managed
than a product with lower levels of guarantees. The
resulting different investment returns would be
allocated to policyholders through the bonus system.
(

6. Hibernian will report on the investment
performance of the assets in the With Profit Fund
on a yearly basis. This information will be posted on
the Hibernian website at www.hibernian.ie

Bonus and smoothing policies
7. Investments in the With Profit Fund by policyholders
are made by the purchase of fund units. The fund
price on that day determines how many units in the
fund are purchased
8. The return on the assets in the With Profit Fund is
allocated to policyholders through a bonus system.
The objective of the bonus system is to provide
policyholders with a smoothed rate of return. The
value of policyholder investments increases each
year by a predetermined rate. This is called the
Annual Bonus Rate and is declared in advance each
January. The fund price increases on a daily basis to
reflect the bonus rate. The annual bonus will not
be less than 0%.
9. Assets vary according to potential growth and risk.
Bank deposits offer modest growth potential but
there is minimal risk involved. Stocks and shares
have good growth potential but are more risky.
Property and government bonds (also called gilts)
lie somewhere in-between.
The With Profit Fund invests predominantly in
stocks and shares and bonds. These assets can have
some very good years but can also have some poor
performing ones. The performance of the assets
held feeds through to how the With Profit Fund
performs. Instead of paying out exactly what the
Fund returns each year, the With Profit Fund
smoothes the variations in performance by holding
back some returns in good years to compensate for
the years in which fund performance is more
disappointing. While the payments of the profits to
the policyholders in the Fund can be spread out
over a number of years, all the profits are paid out
over the long term.
10. In normal financial conditions Hibernian manages
the smoothing process of the fund using a number
of guidelines:
• The rate of the annual bonus will be set in order
to target no more than 1/3 of the total payout
being paid in the form of a terminal bonus.


+ 
• Hibernian will pass on to policyholders all the
investment returns of the assets of the fund.
• On average Hibernian will pay out 100% of what
the policy has earned. However in any one year
payouts on maturity will normally vary between
90-110% . When the fund performs well the
payout may be closer to the 90% end of the
spectrum. After poor investment performance the
payout may be closer to 110%.
• The maturity payouts on equivalent policies will not
normally vary by more than 10% from year to year.
11. Annual bonuses are declared with a view to
providing a terminal bonus. On average we aim to
share out two thirds of the investment returns
through annual bonuses. Any balance is paid as a
terminal bonus. However there is no guarantee of
Annual or Terminal Bonuses as these are dependent
on the performance of the underlying assets.


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## Troy (28 Nov 2002)

*Welcome Development*

This is a very welcome if somewhat overdue clarification.

We now have it from the horse's mouth.  There is no "black hole", at least not at Hibernian (make your own judgments re CL).

But this statement goes much further than simply providing that clarification.  It brings Hibernian's With Profit Bonds onto a clearly superior level of transparency compared to its competitors.  We now know for the first time what to expect in Terminal Bonuses.  These can be expected to be half as much again as the Annual Bonuses.  Even if next year's Hib bonus were to fall to 4% that would mean policyholders can expect an overall return of 6% per annum.  Not bad for a guaranteed product!


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## Brendan Burgess (28 Nov 2002)

*Re: Welcome Development*

I would suggest the following additions;

12 Hibernian will no longer use misleading first year bonuses in their advertising material. 

13 Investors investing large amounts of money will not get a favourable allocation of units at the expense of the smaller investor.

14 Any inducements to invest will come from Hibernian’s funds and not the with profits fund.

15 Hibernian will give full details on the management charges deducted from the funds. 

Brendan


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## Ruby (28 Nov 2002)

*Suggestion 14*



> Ruby
> Unregistered User
> (8/1/02 9:45:14 am)
> Reply
> ...


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## ClubMan (2 Dec 2002)

*With Profits*

Have a look at the with profits report on the Irish Society of Actuaries website [broken link removed] I think this is being discussed on 4th December by the member actuaries. It could shed more light on things.

_Edited by ClubMan to fix link._


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## Dogbert (5 Dec 2002)

*Big Swinging Charter*

Hibernian with-profit charter ... woo-hoo !

Apart from Brendan's comments on Hibernian's shady marketing practices, with which I agree, the whole charter would seem to be nothing more than a (less comprehensive) restatement of some transparency principles which Irish Life made public when they launched their with-profit fund some eighteen months ago.

A welcome development, perhaps, but definitely not breaking new ground as regards transparency.


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## Fairfield (6 Dec 2002)

*UWP Charter*

Dogbert, I would hardly hold Irish Life up as the paragon of transparency where With Profits is concerned. Quoting a bonus rate of 6% which is actually 4% after AMC (when every other provider declares a bonus net of charges) is misleading at best. Given that many investors buy these products based purely on the headline number (no doubt despite good advice from intermediaries that the annual bonus rate is something of a red herring!) gives lie to the claim that it was Irish Life that stole the march on transparency. Although in fairness Hibernian have hardly covered themselves in glory where annual bonus rates are concerned, and I share your scepticism about its shady marketing practices.

I am not a Hibs fan (nor an IL foe), but its Charter is a very comprehensive move in the direction of addressing the issues of transparency that have dogged this market for some time. IL's UWP if anything was more opaque than others given the fact that it was invested in a UK mutual about which nobody knew a whole lot. And as it turns out, Winterthur are now in a spot of bother from a solvency point of view.

That said I am not sure how the new disclosure statements it has signed up for will work in reality. It has been suggested that selection against an institution may occur where there is a high level of disclosure.


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## Dogbert (6 Dec 2002)

*Hibernian Charter*

Hi Fairfield,

My point was simply that the much-ballyhooed Hibernian charter is nothing more than a policy statement around investment strategy, bonus policy, smoothing policy, etc ... which is precisely what IL gave when they launched their fund eighteen months ago. So it's hardly ground-breaking, though it is helpful.

IL may quote its bonus rate gross. But IL, unlike Hibernian, hasn't had its knuckles rapped by the regulator for the way its marketed its with-profit fund. In fairness too, IL's partner is part of the Credit Suisse group, which pretty much everyone has heard of.

Finally, with the greatest respect to Troy, Grant Barrans statement doesn't say anything about a black hole. It simply says there's no solvency issue with Hibernian. The black hole issue relates rather to the extent to which the with-profit fund is underwater and how future entrants may be called upon to subsidise existing promises. Again it seems to me that IL has handled this better - they closed their first fund and opened another one (with a slightly lower equity content).


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## Amellion (6 Dec 2002)

*Charter*

This is a significant step in the right direction,as is the disclosure(in recent presentations to Brokers) that their WP Fund is 'above water'.I suspect this is due in no small part to the 'estate' handed on from the Norwich on de-mutualisation. 

It is stated in the Society of Actuaries paper that only one company does "... not directly smooth maturity payouts,paying as close to 100% of an individually calculated asset share as possible." I do not know which WP provider this is,but it strikes me as the only one with which someone investing now should be prepared to deal.

Under other regimes,very significant cross-subsidisation between policyholders is possible (& inevitable after the markets we have had).

By way of light relief(& I am not a fan of WP),the same paper includes the extraordinary statement(p.42)..."It became very obvious that even a group of actuaries who supposedly specialised in with profits business,did not always understand the key features of the products available from other life offices." !!


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## Dynamo (6 Dec 2002)

*Hibernian Charter*

Looks like Laura Slattery in today's _Irish Times_ is as underwhelmed as Dogbert is by Hibernian's charter. She says that the charter 





> contains similar information to other brochures for with-profit bonds.



Not much that's earth-shattering there, then.


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## The Snorkler (7 Dec 2002)

*Playing with Words*



> _...their WP Fund is 'above water'..._



The High Priests' paper defined "underwater" as where the Face Value (Initial Investment plus Bonuses) was above the underlying asset values.  Every WP company, but *every* single one, is underwater in this sense, which is the sense that matters for new policyholders.

Hib presumably mean that the actuarially discounted value of their Face Values is less than the assets.  I would hope so, otherwise they would be insolvent.:rolleyes


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## Punch (9 Dec 2002)

*Hib.*

Snorkler- can you shed light as to why the value of amounts invested plus bonuses would have been discounted in calculating the UWP Fund's surplus/deficit?Surely unless there was little or no addition of future bonuses this can hardly have made the comparison more favourable?

I saw the presentation Hib. made to brokers & I would bet all of those present took the comparison to be a 'straight' comparison.

Thanks Aardvaark for mentioning Soc. of Actuaries paper - it was fascinating (in its own way you understand...!).Page 32 caught my eye in terms of the question of 'cross-subsidisation' which has cropped up quite a few times on AAM.

Dealing with who picks up the cost when guarantees come into play,there is the following statement.."The extent to which this cost(guarantee costs) is shared between current and future generations of policyholder will be determined by an office's bonus policy."

I can only interpret this as saying that of course it can & does happen !

Interestingly,Craig Tunstall of Standard Life (whom I seem to recall de-bunking the suggestion of cross-subsidisation quite vigourously in correspondence with B.Burgess),was on the SOA Working Party which prepared the paper.....


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## The Snorkler (9 Dec 2002)

*Actuarial Lesson*

_Punch_ asks:





> "Snorkler- can you shed light as to why the value of amounts invested plus bonuses would have been discounted in calculating the UWP Fund's surplus/deficit?Surely unless there was little or no addition of future bonuses this can hardly have made the comparison more favourable?"


The way it works is that the Actuary uses a discount rate of say 5%.  He is then allowed to say that if the company truly earns 5% its bonuses will fall on  a "Glide Path" to say 1%.  Hence the effective discount rate becomes 4%.  Over 10 years that amounts to over a 30% discount which should be enough to fill the Black Hole.


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## Punch (9 Dec 2002)

*glide*

If you are correct,Hib's presentation was quite disingenuous - I certainly took the 'surplus' to meet assets at Market Value minus the amounts invested plus declared bonuses.That would,I imagine,be what most others would have understood.


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