10Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.

SECTION 10 Reporting Date Recalculations - Benefits Providing a Discretionary Entitlement to Share in the Investment Experience of Assets Backing them.

Overview

The recalculation methodology described in this section establishes how the Policy Liability changes and, hence, how profit emerges over the period for discretionary business. The objective of the methodology is to determine Operating Profit in accordance with the framework of the Act.

For a Participating Benefit (including a friendly society benefit under a benefit fund where there is a provision for distribution of unallocated surpluses to policy owners), two important aspects of this framework are;

1. The allocation of Operating Profit is a distinct process from the distribution of retained profits. It is the value of declared Bonuses and shareholder transfers out of the fund which are distributions of retained profits (inclusive of the Operating Profit allocated in the period)

It is the Operating Profit which is the amount allocated between policy owners retained profits (or unallocated surplus in the case of friendly societies) and shareholders retained profits.

1. Operating Profit includes shareholder profit and policy owner profit. It comprises:

• the value of current period Best Estimate Bonuses (including best estimate interim and terminal bonuses and the value of best estimate reversionary bonuses) and Best Estimate Shareholder Profits; and
• non-investment Experience Profit.

For Non-Participating Benefits which have an entitlement to discretionary additions, the approaches described in this section may be applied for recalculating Discretionary Additions and Profit Margins. The section is to be interpreted by substituting “discretionary addition” for “bonus”. It must be recognised that the “discretionary addition” is not a “bonus”, and consequently the cost of any “discretionary addition” in the current period forms part of the Policy Liability at the reporting date, while the cost of any “bonus” in the current period is an allocation and distribution of current period operating profit and does not form part of the Policy Liability at the reporting date.

It is noted that for Participating Benefits (but not Non-Participating Benefits which have an entitlement to discretionary additions), the recalculation methodology means a change in assumptions (predominantly non-investment assumptions) may affect current year profit, through changes in the rate of Best Estimate Bonus. In these specific circumstances, this result is considered appropriate and in compliance with the intent of the principles of section 3.

10.1 Recalculation of Profit Margins

10.1.1 Where Profit Margins are determined at Commencement, the principles of section 3 require a recalculation of those Profit Margins at each subsequent reporting date to ensure that future expected profits are neither released prematurely nor deferred inappropriately.