Surplus funds calculations


Surplus Funds 3.2 generally requires the value of with-profits policy liabilities to be calculated on the basis of a retrospective approach set out in Surplus Funds 3.3. However, where this approach would not adequately reflect the value of the liabilities, or the firm is able to demonstrate that this approach is not practicable, then the prospective basis for calculation in Surplus Funds 3.4 is required. The PRA expects firms to consider whether the application of the retrospective approach would be practicable given the nature of their with-profits policies and, even if possible, whether the results would be meaningful or an appropriate basis for the calculations. While each firm will need to consider its own specific circumstances, whole of life policies or other policies where the result of the retrospective calculation might be negative or significantly lower than the value calculated using the prospective approach are examples where the prospective approach might be necessary.


Calculations of with-profits policy liabilities are determined on the basis of the aggregate value in respect of each with-profits policy. For this purpose calculations may be based on groupings of similar policies (or other approximations) provided that firms can demonstrate that:

  1. (a) where approximations or generalisations are made they are likely to provide the same, or a higher, result than a separate calculation for each with-profits policy;
  2. (b) the grouping of policies does not materially misrepresent the underlying exposure or misstate the costs of guarantees, options or smoothing; and
  3. (c) the selection of groupings is based on policies with similar attributes including the status of guarantees.


The PRA expects firms to ensure that the choice of groupings is appropriate having regard to (a) to (c) above each time it calculates surplus funds.


The reference to ‘permanent enhancements’ within Surplus Funds 3.3(3) is intended to capture amounts previously added to with-profits policy liabilities which a firm expects to be permanent at the time of the surplus funds calculation (ie to apply in all but the most extreme adverse circumstances). Any change in the additions that are considered permanent over time should be reflected in subsequent calculations of surplus funds.


The reference to ‘miscellaneous surplus’ within Surplus Funds 3.3(4) is intended to capture surplus or deficit arising from the experience of the with-profits fund, that may have been allocated to the value of with-profits policies prior to (or on) the valuation date. Examples include mortality or expense experience (relative to expectations) or profits or losses arising from non-profit business within the with-profits fund.


Surplus Funds 3.5 specifies the extent to which future discretionary additions to guaranteed benefits and discretionary payments should be included in benefits payable for the purposes of the prospective calculation in Surplus Funds 3.4. In arriving at their projections of future discretionary benefits firms will need to comply with the requirements of the Solvency II Regulations as well as the intent and provisions of the Surplus Funds Part. The PRA would not expect a firm to include within benefits payable distributions from the estate that it might make over the life of the with-profits policies were the with-profits fund in run-off, or that it expects to make if it is currently in run-off.


The PRA expects that firms will have regard to their current expectations as to payments which are likely to be made taking into account the principles underlying the retrospective approach. This does not mean that a firm which uses the prospective calculation to value some or all of its with-profits policy liabilities is also required to perform a retrospective calculation. Firms’ current expectations as to an affordable, prudent and realistic level of distributions should inform their projections of future discretionary benefits.