James Daley: The men from the Prudential should learn to live in the present

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The Independent Online

The gallant Prudential - Britain's second largest life insurer - came galloping to the rescue of the UK's ailing savings industry this week (apparently), announcing plans to "revitalise" the market - or as Pru's UK chief executive put it, "to reheat investors' cold feet".

The gallant Prudential - Britain's second largest life insurer - came galloping to the rescue of the UK's ailing savings industry this week (apparently), announcing plans to "revitalise" the market - or as Pru's UK chief executive put it, "to reheat investors' cold feet".

The answer to all our prayers (apparently) is PruFund, a new breed of with-profits bond, but without most of the nasty bits, which have made with-profits the villain of the savings industry over the past three years.

Like conventional with-profits products, PruFund aims to deliver "smoothed" investment returns, which eliminate market ups and downs, generate a better return than the building society and give policyholders a greater degree of certainty over what they are likely to get back.

What differs from the original model, is that PruFund promises to depart from the old annual and final bonus concept - which has seen policyholders continually disappointed over recent years as rates have been cut. It also pledges to do away with market value reductions (MVRs), which in simpler terms are the huge penalties that you currently have to pay when you exit with-profits funds.

The logic behind Pru's latest brainchild is that while customers have grown disillusioned with the failure of with-profits, they are still attracted to the idea of smoothed investment returns and the supposed degree of certainty they offer - so why ditch what is essentially a good concept?

Well here's why. With-profits is a dated concept that was designed to soothe the consciences of investors who did not understand a great deal about investing. For the seasoned investor, ups and downs are all part of investment, and if you want to provide yourself with a greater degree of certainty the key is to diversify your portfolio across bonds and property as well as equities, which PruFund does.

But the idea of smoothed returns is an unnecessary added complexity. If you need real certainty from your investments, then you will be better served by some of the many structured products on the market, or a medium-term savings bond, which guarantee a certain level of return.

While PruFund will try to ensure that you do not feel the falls in the market as hard as if you were invested directly, it cannot truthfully tell you it knows how well it will perform over the medium or long term.

Furthermore, in spite of its move to ditch bonuses and MVRs, PruFund still clings onto many of the horrors that gave with-profits a bad name: commissions to advisers are high; the fund will distribute 10 per cent of its returns to shareholders and not to policyholders; and Pru still reserves the right to make one-off slashes in the fund's return at any time it likes, if markets undershoot its predictions by more than 10 per cent.

PruFund is perhaps the way with-profits should have been when they were first invented, but I'd be willing to wager that in this form or any other, they no longer have a long-term future.

While it may be a slow process, Britain is hopefully on the road to developing a better, financially educated public that understand the risks of the market, the importance of diversification and the need to understand your savings objectives and time-horizons. As this understanding takes grip, with-profits can only become irrelevant.

The Pru is one of the oldest life assurers in the UK - a fact which remains one of its biggest assets as well as its biggest hindrance. While its oldest customers fondly remember the days of "The Man from the Pru" and take comfort in putting their money with a well established company, its management struggles to achieve real cultural and directional change in a firm that is more than 150 years old.

Its latest initiative is another blast from the past, which will fall a long-way short of its ambition to reheat those cold feet.

* After months of procrastinating over whether to put a cap on the amount of interest that lenders charge, the Government finally decided against it this week.

For lower earners, who often rely on borrowing small amounts at a relatively high rate of interest, this may well be the right move. Such a cap would have put many of these lenders out of business.

One can only hope, however, that the Competition Commission will not avoid recommending such a cap for the store card industry when it reports next year. Here, rates of 30 per cent a year are commonplace and entirely unjustified.

Given the industry's reluctance to voluntarily lower rates, a cap may be the only way to provide a fairer deal for the consumer.

The devil is in the policy document smallprint

The general insurance industry is set for a long overdue shake-up in January, as the Financial Services Authority begins regulating the sale of motor, home, medical insurance and the like. For most, the new regime will be a rude awakening, with standards needing to improve by quite a margin.

Only this week, Cancer BACUP, a specialist charity, revealed that the majority of private medical insurance policies will not pay out beyond the first round of treatment if their policyholder is struck by cancer. Not surprisingly, however, policyholders are rarely told such crucial information when they are sold the cover. Instead, it is buried within a lengthy terms and conditions document, which your attention will be drawn to when you move to make a claim.

In the motor world, things are no better. If you take out a motorcycle insurance policy with Bennetts, one of the market's largest brokers, as I did, you'll find that if you claim, you could still be liable to pay a full year's worth of premiums - something that your friendly broker won't remind you of until your bike gets stolen.

And how about the home insurance market? Watch out for how steeply your premiums will rise after you're past your first year - another thing they forgot to mention when you were sold the policy.

The FSA will need to be ultra-vigilant to eliminate these and other sharp practices, which are endemic in the general insurance industry. It would be no bad thing if one or two of the worst were made an example of.

j.daley@independent.co.uk

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