LAM05090 - Apportionment rules: Allocation of BLAGAB income and gains outside a with-profits fund

Assets held outside a with-profits fund may be in a single pool or may comprise a number of separately managed, identifiable pools of assets. For example, assets held to back unit-linked liabilities will be identifiable and separate for BLAGAB and non-BLAGAB. However some individual unit funds may be held to back both BLAGAB and non-BLAGAB policies and so income and gains arising in these funds will require allocation on a fund by fund basis.

A company may have a separate pool of assets held to provide for future payments under guarantees (for example, a guaranteed minimum return for annuitants). In such cases, it would be reasonable for the BLAGAB-related element of income arising from those assets to be determined by reference to the liabilities for which provision has been made.

Where the assets are held to back a mix of policyholder liabilities, some of which relate to BLAGAB and the rest to other long-term business, allocation should reflect the underlying commercial position. In other words, for what purpose are the assets held? The focus should be on the measure the company uses to drive its business and that the measure used aligns with the allocation of assets within the business.

If no allocation of any kind is made for commercial purposes then it may be reasonable to calculate the BLAGAB-related element by reference to the mean policyholder liabilities (excluding those liabilities where another more specific apportionment has already been made – for example, unit-linked liabilities) of the categories of business that the assets back.

For example, if the assets support a mix of business whose mean policyholder liabilities are split between BLAGAB and other long-term business in the proportion 25:75 it may be reasonable to allocated 25% of the income from those assets to BLAGAB.

If such an approach were adopted for the purposes of establishing the BLAGAB-element of income and gains a consistent approach should be used as part of the method for splitting trade profit between BLAGAB and other long-term business (FA12/S98).