Red alert over supposedly 'safe' policies
Investments involving the sale of life insurance were marketed as low risk. But unwary people have suffered, as Maryrose Fison reports
Sunday 20 February 2011
Consumers are being warned to give investment products known as traded life policies (TLPs) a wide berth as a major UK watchdog and finance experts say they carry major risks.
The products first came to the fore in the US and have been marketed as ultra-safe investments to thousands of British savers and investors over the past few years. The trade involves the sale of unmatured life insurance policies to a third party investment company; the policyholders received a larger lump sum settlement than would have been possible had they surrendered it to the original insurer.
Investors on the other side stood to benefit when the policyholder died, because the death benefit payout would be (in theory) greater than the lump sum they paid to the policyholder. Investment companies recognised a gap in the market and began pooling policies together in funds which advertised attractive annual returns with little risk.
But problems are emerging with the accuracy of the underpinning life-expectancy assumptions. Estimating how long policyholders will live after they have sold their policy to an investment company has been notoriously difficult. Advances in science and medicine have meant well-intentioned longevity calculations have proved inaccurate, while some companies have been suspected of manipulating medical assessments to give unrealistically short life expectancies.
Two sets of exclusive figures given to The Independent on Sunday by the Investment Management Association (IMA) and the Financial Ombudsman Service underline some of the risks of investing in TLPs. The mis-selling of these funds has caused more than £250m in compensation to be paid to consumers to date, with 55 per cent of complaints about the sale of TLPs being upheld by the ombudsman.
"The need for fund managers to pay some £250m compensation to investors is a graphic illustration of the risks that investors in these products run. They certainly should not be promoted to the public as low-risk investments," the IMA said:
But that is what is happening, according to Andy Gadd, the head of research at financial services firm Lighthouse.
"They have become popular in the UK because, in a low-growth low-interest rate environment, the projected returns appear to be attractive," said Mr Gadd. "But the significant losses which can occur when the life expectancy figures are miscalculated are not spelled out enough."
Mr Gadd added that the TLP market "is getting bigger every year" and has now gravitated towards senior life settlements where life-expectancy projections are sometimes perceived as being more accurate. However, he said, this is no guarantee that investors in such products won't be stung. "The accuracy of forecasting the expected life span of senior life settlements is still open to what may ultimately turn out to be significant error."
Further evidence of the problem came to light last month when the Financial Services Authority (FSA) floated the idea of reclassifying the products as "generally unsuitable for the mainstream retail market". But Jason Witcombe, a financial planner at advisory firm Evolve, said the watchdog needs to go a step further as the products continue to be sold to consumers, many of them elderly, ill-placed to handle losses that can occur.
"Put crudely, people do not always die when an actuary expects them to," said Mr Witcombe. "Unless the manager of the fund holds a lot in cash, this can lead to real problems for investors when trying to redeem holdings with delays of many months.
"The popularity of lots of niche investments is down to clever marketing. Particularly when savings accounts are paying such low rates, lots of investments try to sell us the idea that risk and reward don't go hand in hand, that high returns can be achieved with little risk. But this is clearly untrue. Risk and reward are inextricably linked and you shouldn't believe anyone who tries to tell you otherwise."
While some providers of TLP do generate attractive returns, TLPs are a high-risk investment not to be considered by anyone without a sophisticated understanding of the ins and outs of the product.
As for advisers, they may not be capable of shifting the investment winners from the potential losers, said Martin Bamford, a director of IFS firm Informed Choices. "Investors need to be extremely careful before exposing their money to traded life policies," he said. "This is still a relatively new asset class for UK investors, and independent financial advisers may not have the knowledge, experience or resources to conduct sufficient due diligence before making a recommendation."
Paul Duckworth, a chartered financial planner in Grimsby, said the combination of high and consistent returns with minimal risk should always ring alarm bells for prospective investors. "If it looks too good to be true, it probably is."
Louise Oliver, Taylor Oliver
"Traded life policy investments are complex with a number of risks attached. For starters, returns are based on an accurate estimation of life expectancy. Medical advances can, and do, prolong life and undermine these longevity assumptions."
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