60 Business overview  Results of operations – United Kingdom For its with-profit business, Aegon UK’s general philosophy is  to match guarantees with appropriate investments. However,  the nature of with-profit businesses typically prevents perfect  matching, and the role of the MIC is therefore to monitor the  capital implications of any mismatching. On a regular basis,  reports are produced covering the impact of a range of possible  investment scenarios on the solvency of each of the funds. These  reports allow the investment strategy for the with-profit funds  to be discussed and are summarized for the With-Profits Forum,  a sub-committee of the Board of Aegon UK.  For non-profit business, interest rate risk arises substantially  on Aegon UK’s large book of annuities in payment. Assets  are purchased to provide a close expected match to liability  outflows, with regular reporting to the MIC on the capital  implications of any mismatching. For unit-linked business, the matching philosophy results in  close matching of the unit liabilities with units in the relevant  underlying funds. A proportion of the unit-linked assets are  invested in funds managed by external investment managers.  The MIC monitors the performance of the investment managers  against fund benchmarks. The invested assets, insurance and investment contract liabilities  of Aegon UK’s with-profit fund are included in 'for account of  policyholder assets and liabilities'. Assets and liabilities are  always equal, as an excess of assets over liabilities regarding  guaranteed benefits and constructive obligations is classified  as an insurance or investment contract liability. The Scottish  Equitable with-profit fund is a 100:0 fund, whereby benefits are  held for participating policyholders. The operation of the Scottish Equitable with-profit fund is  complex. Below is a summary of Aegon UK’s overall approach. With the exception of Aegon Secure Lifetime Income and 5 for  Life, which are written by Aegon Ireland plc, and the product  guarantees within Investment Control and Income for Life, which  are reinsured to Aegon Ireland plc, all Aegon UK contracts with  investment guarantees are written in policyholder-owned funds  (otherwise called with-profit funds). These funds contain free  assets which have not yet been fully distributed to individual  policyholders. Free assets help meet the cost of guarantees and  provide a buffer to protect the fund from the impact of adverse  events. Aegon UK has an exposure only once these assets have  been exhausted. As outlined below, Aegon UK believes this  exposure to be low. In previous years, Scottish Equitable sold guaranteed annuity  products in the United Kingdom. Certain policies also have  a guaranteed minimum rate of return or guaranteed minimum  The results of the with-profit fund’s investment performance are  distributed to policyholders through a system of bonuses which  depends on: Aegon UK’s with-profit fund has an investment strategy that  reflects the nature of the underlying guarantees. The fund can  invest in a variety of different asset types. The main categories  are United Kingdom and overseas equities, United Kingdom  fixed interest securities, and cash. The with-profit fund has  a target range for the percentage of its assets that are invested  in equities, and this range may be varied. Within these target  ranges, there is a policy of holding an appropriate mix of asset  classes to reduce risk. Guaranteed rates of return on with-profit policies are typically  in the range of 0% to 5.5% a year; however, the highest rates  have been closed to premiums since 1999, and all funds have  been closed to new business with investment guarantees since  October 2002, except for a small increase in regular payments.  For a number of contracts written mainly in the 1970s and  1980s, Scottish Equitable also offered minimum pension  guarantees, including guaranteed annuity options. As life  expectancy rates have improved and interest rates have fallen  over time, these minimum guarantees are now often valuable. As part of its demutualization process prior to acquisition by  Aegon N.V., the business and assets of Scottish Equitable Life  Assurance Society were transferred to Scottish Equitable plc  on December 31, 1993. Aegon UK has no financial interest in  Scottish Equitable plc.’s with-profit fund, except routine yearly  fund management charges, and costs and expenses that the  company agreed to accept at the time of demutualization. pension or guaranteed death or other benefits. Guaranteed rates  of return apply only if the policy is kept in force to the dates  specified, or only on the events described in the policy conditions.  The costs of all guarantees are borne by the with-profit funds  and therefore impact the pay-outs to with-profit policyholders.  With-profit fund Management of the with-profit fund Guarantees ■ The guarantees under the policy, including previous annual  bonus additions. ■ The investment returns on the underlying assets, with an  allowance for ‘smoothing’ to reduce volatility. Although  smoothing means that investment profits are spread from  one year to the next, the aim is to pay out all of the  investment profits earned by the fund over the long term. For  early withdrawals, there are other measures to ensure that  a fair share of total fund growth is received. A market value  reduction may be applied to certain funds where, for cohorts  of similar contracts, the face value of the benefits is greater  than the value of the underlying assets. Policy conditions may  state specific points for which a market value reduction will  not apply. Annual Report 2013