Royal London announces the introduction of ProfitShare for pensions customers
7 October 2015
Royal London, the largest mutual life, pensions and investment company in the UK, is to introduce ProfitShare to allow its unit-linked pension and drawdown customers to share financially in its success. This innovative way for customers to share in the success of a financial services business is an industry first for the pensions sector.
From January next year, in addition to the existing With Profits allocations, a new ProfitShare amount will be awarded to any new customers buying a unit-linked pension plan and to existing unit-linked customers who have set-up a unit-linked pension plan since 1 July 2001.# This will include all those customers who have been automatically enrolled into a workplace pension. Royal London estimates that 600,000 existing pension customers will immediately benefit and over the next five years 400,000 new pensions customers will be eligible to participate in the ProfitShare arrangements.
In 2007 Royal London introduced profit sharing arrangements for its With Profits customers. Since then the savings of existing With Profits customers have been boosted by distributing profits of over £460m in total. To ensure that our existing With Profits policyholders are not adversely affected by the introduction of this unique ProfitShare to customers with unit-linked pensions, the percentage of the company profit that will be available for distribution will be increased. With Profits members will also benefit from enhanced regular bonuses.
Royal London commissioned an Independent Expert to ensure that the way ProfitShare works is fair for all those who qualify both new and existing customers.
Royal London is the first customer-owned life, pensions and investment provider to enable customers to share in the profits of the company in this way. Throughout we have kept our regulators - Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) – informed and they have no objections to our approach.
Phil Loney, Chief Executive of Royal London said: “As a mutual company we want to ensure that our customers and members have the best outcomes and experience, and we wanted to find a way for those members of Royal London who don’t invest in our With Profits fund to also share in the profits of our business.
Our innovative approach will significantly increase the number of Royal London customers who will see their savings increase through sharing in our profits and will further enhance our already strong competitive position in the pension and drawdown markets. It also sends a strong signal that Royal London remains a robust, independent, customer-owned organisation with our customers’ interests at the heart of everything we do.”
How ProfitShare will work
From the start of 2016 all new Royal London Workplace Individual Pension and Drawdown policies will share in our profits, plus all existing unit-linked Royal London Workplace, Personal Pension and Drawdown policies, taken out since 1 July 2001.
Royal London will then review its financial strength and performance at the end of 2016, and each subsequent year, to decide whether a ProfitShare may be awarded. Customers will then qualify to receive any unit-linked ProfitShare allocation awarded, in April the following year, provided their plan is still in force. So the first award will be made in April 2017.
Based on previous experience and future business plans our aim is to award a ProfitShare of between 0.15% – 0.25% of the unit-linked value of the qualifying customer’s plan. Pension customers typically pay charges of between 0.3% and 1.0% for UK pensions depending on the type of product and the size of pension pot, so we believe the positive impact of our ProfitShare will be meaningful. The amount will be added as a separate ProfitShare account within the customers plan, invested in the same investment choices as the main plan. Over time, the separate ProfitShare amounts awarded are expected to boost customers’ retirement savings and will be available for customers to access, along with the rest of their retirement benefits, any time after age 55.
There is no guarantee that ProfitShare will be awarded every year as this depends on the overall success of Royal London and the performance of financial markets. However, once a ProfitShare amount has been allocated to a qualifying customer’s plan it will not be taken away. The ProfitShare does not count as a contribution and so does not reduce the level of tax free contributions that customers can make to their pension plan each year.
Boosting savings and retirement income
Take for example, a customer who joins their employer workplace pension next year aged 30 and who decides to contribute £200 per month and then retires at age 65 could see their savings increase by possibly £4,584 or 4%*, from £116,324 to £120,908, if a ProfitShare of 0.20% is added to their plan each year.
Assume this same customer then starts to access his savings through income release, taking an income of £500 per month increasing in line with inflation. Without ProfitShare he could have this level of income until 88. With ProfitShare at 0.2% each year he could have this level of income until 90. So the benefit of ProfitShare over his lifetime could be an additional 2 years' worth of retirement income.
Phil Loney continued: “The introduction of ProfitShare is fantastic news as it will help to enhance the future retirement saving of our customers. The research findings in our recent Pensions Through The Ages report** worryingly highlighted just how many of today’s UK population could face retirement in poverty. Encouragingly the results also show that 6 in 10, 61% of those in defined contribution schemes across all age groups surveyed, had been auto-enrolled. These savers currently benefit from the contributions made by their employers, and now, if they are in a Royal London pension scheme they know that their savings will also be boosted by our unique ProfitShare initiative.
We are only able to offer ProfitShare because we are a member-owned company, committed to helping our customers meet their long-term goals.”
For further information please contact:
Corporate PR Manager
Head of Corporate Affairs
0207 506 6740
0207 506 6175
Notes to editors
# 1 July 2001 is the date at which Royal London acquired the business of Scottish Life
* The figures are based on assuming a mid-point growth rate of 2.4% p.a.; that the regular contribution of £200 will increase each year in line with inflation at 2.5% p.a. and a yearly charge of 0.75% will apply to all contributions and a ProfitShare award of 0.20% of the value of the plan, each year.
** A copy of the Pensions Through the Ages report is available to download at http://po.st/pensionsthroughtheages
For hundreds of years, the strength and security of the mutual company has been at the heart of the UK economy.
Most began as a collection of individuals with a shared interest, who would contribute to a shared fund and in return receive financial support should it be needed. As these deposits grew, their members would make decisions on how the mutual company and its funds would be organised and run for their benefit.
By the late 1800’s there were around 27,000 registered mutual societies[i] and today, 25 million people in the UK are members of at least one mutual organisation.[ii]
Owned entirely by their members, what sets mutual organisations apart is that they can offer an alternate management and governance model to public limited companies. The difference between the two is that, where a PLC is owned by and accountable to external shareholders, mutual organisations, such as Royal London are owned by their members.
When it comes to distribution of profits under the traditional plc structure, profits are paid out as dividends to the investors who hold shares in the company. The interests of the customers of the plc may not align with those of the external shareholders. By contrast, the close ties between the mutual firm and its members, who are its customers, ensures that there is an interest in the business and how the company is run.
Royal London believes that as it expands, the number of customers who are also members of the firm, should also grow so more benefit from the firm’s financial success.
[i] Association of Financial Mutuals [ii] The Mutuals Yearbook 2013
Independent online research conducted for Royal London by Harris Interactive Ltd, of a UK nationally representative sample of 1003 adults by age, gender and region, aged 18 or over, from 16th and 21st September 2015, showed that:
- Over half, 51% were familiar with the concept of a mutual company.
- 91% found the concept of ProfitShare extremely /very or appealing.
- 3 in 10 (29%) UK adults currently working stated a preference for their workplace pension provider to be a mutual compared with only 18% for a large financial provider.
- Over a third (37%) of those not currently in a workplace pension scheme said that they would definitely or very likely join a company pension scheme if the pension provider shared some of its profits with customers.
About Royal London:
Royal London is the largest mutual life, pensions and Investment Company in the UK, with Group funds under management of £83.4 billion. Group businesses serve around 5.3 million policyholders and employ 2,922 people. (Figures quoted are as at 30 June 2015.)
The Group is currently moving all of its UK and Ireland Life, life, pension and investment businesses under a new version of the Royal London brand. The Group's independent wrap platform will remain branded Ascentric.