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Prufund Pricing Correction

See the communication from David Montgomery

Questions and Answers

Expected Growth Rate (EGR) is the amount by which the smoothed price of PruFund will increase on a day-to-day basis.  It is forward looking and reviewed quarterly.   Unit Price Adjustments (UPAs) are the backward-looking mechanism by which the smoothed price can be adjusted to reflect the actual returns of the underlying investments.

Question Answer
What was the error? In September we completed a number of downward UPAs but the size of the adjustments were incorrect due to a clerical error. This then meant that in some instances it affected the UPA in October also. In two instances this error caused a UPA to occur which should otherwise not have happened.
How did the error happen? This error happened as a result of a clerical error which triggered the UPA in September and in some instances affected the UPA in October also. 
When did you know about this error and why wasn’t it corrected sooner? We identified this error ourselves in October and corrected the unsmoothed prices at this point. However, we needed more time to determine the right adjustments to apply before we analysed the client position to ensure we captured all affected clients. 
When did the adjustments take place? Funds were adjusted on the 25 November, and the impact of the adjustments would have been visible from thereafter. 
Why aren’t all versions of PruFund impacted? Once identified, the error was resolved quickly in the unsmoothed price. Only funds which had UPAs in September required a further adjustment to the smoothed price.
Why wasn’t the error corrected at the October investment date? All UPAs that occurred in October were calculated using the correct unsmoothed price. However, to ensure any corrections were given the appropriate consideration it was necessary to leave any adjustments to the November investment date. 
Why couldn’t you just wait and correct the error when the next UPA is applied?

It was important to correct the error as soon as possible to avoid potential issues where investors are entering or exiting the fund at an incorrect price. UPAs are also formulaic and non-discretionary and this requires a special adjustment separate from the normal smoothing process.

Were the UPAs in September incorrectly applied? The UPAs were primarily driven by the underlying performance of the funds in line with our standard smoothing mechanism but, had the error not been present, the size of the UPA applied would have been different.
Why are correction figures different for each version of PruFund? The error related to a specific asset class and each version of PruFund will hold this in varying allocations which will affect end calculations.
Have you identified the affected clients? We know that some clients will have been affected by this, specifically those that put money into the funds, withdrew or switched into these funds. We are in the process of identifying all clients affected and calculating what impact this has had one of them. We will contact you when this work has been completed.
How will you correct the client positions and will my clients be worse off? We will review any losses and gains made and we'll make sure that no client is worse off as a result of this error. We will ensure any net gains are honoured, any net losses will be amended.   
What about the position for clients who have taken withdrawals or encashments from impacted funds? All clients will be put back in the position they would have been in if the error had not occurred. Full details of how this will impact those who have recently taken withdrawals will be provided when available.
How will I know if I my adviser fees have been affected? We are also identifying any advisers that may have been affected by this and completing calculations to understand the impact. If you have been affected, we will contact you to let you know. 
How will you correct my position?  We will review any losses and gains made and will ensure any net gains are honoured, and net losses will be amended.   
Have you stopped any further impact for my clients or me? We have corrected the underlying issue and so there will be no further impact on any payments in or out of the fund, or any  switches into another fund
What’s the impact on affected funds?

Most have benefited from a nominal upwards adjustment. However, the Risk Managed 1 Fund for Series C (IPB) has had an increase of 1.07%, and the RM1 for Series E (RA) has increased by 1.07%.

Only two funds have had downward adjustments; The PruFund Growth Fund Series C (IPB) has had a reduction of 1.16% and the PF Growth Series E (RA) has also reduced by 1.16%.

Why is there a negative correction for PruFund Growth, when all other versions are receiving positive corrections? For PruFund Growth Series C and Series E, a UPA was applied incorrectly in September. Had the error not occurred, there would not have been a UPA in September, but there would have been a downward UPA in October. Given underlying performance of the funds predominantly caused by the significant shift in some asset values globally, this October UPA would have been more negative than the one actually applied in September. Therefore in these cases, investors had smoothed prices higher than they should have been, so a downwards adjustment was required.
Why is the positive correction for Risk Managed 1 higher than other funds? For these funds a UPA applied in September and October. Had the error not occurred there would not have been a UPA in September. This means the adjustment required is an uplift of 1.07%.
What have you done to make sure it does not happen again? The error was identified by us and has been reported and escalated internally in line with the M&G Plc Risk Management Framework. As well as ensuring we correct the client position, we are conducting a review of the controls to understand if we need to do anything more to strengthen these controls. 
How do we know this hasn’t happened across more funds? We have reviewed our funds and we are confident this is an isolated incident. We will however take any learnings from this and apply across all our funds to ensure long term strength of processing. 
Do I need to do anything? You do not need to do anything, once we have completed our client and adviser review, we will contact you to let you know if you have any affected clients with details of the impact and we will also let you know if you have been impacted. 
Do I need to complain to ensure my clients are reviewed? No. We are reviewing all clients who may have been impacted and will contact you when this has been completed. You do not need to complain to trigger this review. If any complaints are raised, a resolution will be made through the complaint process after the above events are concluded.  This ensures a consistent approach is applied to all customer accounts.
Will you be contacting my clients directly? No, we will not be contacting your clients directly
Are you IT systems adequate to manage this fund? The error is not related to an IT failure; however, our review of controls and processes will be holistic. 
Has the fund got too big for you to manage? No. From an investment perspective, the main life fund / PruFund has proven itself to be extremely scalable – it now has well over £100bn in assets, which simply wouldn’t have been possible had the range not been scalable. The size of PruFund allows us to access a breadth of asset classes, which are simply not available to other funds. This means that PruFund offers particularly good levels of diversification. This is particularly true for our real asset portfolio. Taking for example some of the global infrastructure/international real estate holdings, the average lot size is much larger, and smaller funds either don’t have the same access due to size, or are forced to take an extremely concentrated position. There are also ample liquid assets within the main with profit fund to enable it to remain flexible to change as capital markets evolve. The combination of dynamic asset allocation and access to niche real assets has greatly benefited customers vs competitor funds historically, and we hope it would continue to do so in the longer term.

Will this be reviewed independently to ensure everything has been done correctly?

We are conducting a review of controls and the process and will then review next steps when this has been completed.  

Has the FCA been notified?

Yes, we have informed them and will provide updates to them.  
To what extent does the entire WP fund engage in derivative strategies? The WP fund makes use of derivatives for risk management purposes only, primarily to hedge foreign currency risk on holdings of international securities. However, the issue was a clerical error unrelated to the fund’s use of derivatives.
Why is there a negative correction for PruFund Growth, when all other versions are receiving positive corrections?  For PruFund Growth Series C and Series E, a UPA was applied incorrectly in September. Had the error not occurred, there would not have been a UPA in September, but there would have been a downward UPA in October. Given underlying performance of the funds predominantly caused by the significant shift in some asset values globally, this October UPA would have been more negative than the one applied in September. Therefore, in these cases, smoothed prices were higher than they should have been, so a downwards adjustment was required.
Does the adjustment have anything to do with the recent issue around LDI strategies impacting the liabilities held within the with-profits fund?

There is no connection at all. The with-profits fund does not use LDI strategies. The issue was the result of a clerical error, not due to the performance or nature of assets managed by the fund.

 

My clients contacted me when they saw the change in values on MyPru. When was this made and why was it ahead of normal time.

 

The unit price adjustments caused by the error were made on 25th November.  This needed to be earlier than the UPAs under the normal smoothing mechanism were applied to ensure that the correct price was used