Although others have commented on this elsewhere, I cannot resist a few observations about the latest bout of headlines to cast scorn on the concept of the with-profits business. These were prompted by an article in the specialist magazine Money Management by John Chapman, the former Office of Fair Trading official. He has made a name for himself by his relentless and praiseworthy attempts to cast light into the murky darkness that is the innermost workings of the life industry and its product range.
The immediate focus of the article was an attempt to highlight problems faced by with-profits funds that have closed to new policyholders. There have been several notable fund closures, including Equitable Life, of course, but also involving such household names as Royal & Sun Alliance, Britannic Assurance, Pearl Assurance and Scottish Mutual. As Equitable policyholders have learnt to their cost, there are genuine and formidable management problems to be faced in managing a fund that has been closed to new money and is moving into what the industry calls "run-off".
What captured the headlines in this case was the extravagant language Mr Chapman used to conclude his otherwise sensible and worthwhile piece. "The majority of householders will be affected by the upheavals in with-profits, a national nightmare," he wrote.
He added that given the "bizarre" features of traditional with-profits policies, especially the secrecy surrounding how their values are calculated, achieving an orderly rundown of with-profits operations would be a huge task in which savers ran the risk of having their maturity payouts "manipulated" by their insurance companies.
This is strong language, but undoubtedly reflects a growing sense of paranoia about with-profits that has begun to infect many normally sensible advisers and commentators. This has been further fanned by one national newspaper's campaign to highlight the plight of savers whose money has been left stranded in with-profits endowment funds which have also been closed to new investors, and by the FSA's ongoing review of how with-profits policies are run, sold and regulated.
The Sandler Review for the Treasury last year, recommended with-profits policies should be simplified and made more transparent, an objective with which no sane observer could take issue. There is no doubt that the life industry, which for many years has harboured grossly pampered and inefficient operators, has a lot to answer for. But I have some sympathy for the industry's argument that this time, the sensationalisation of an important (if deadly dull) issue is not doing a service to the millions of policyholders whose money is tied up in with-profits policies.
The important thing is to keep a proper perspective on the nature of the problems. The reason so many people have with-profits policies is not primarily because a Machiavellian and profit-hungry industry has tried to con people into buying something unsuitable. Although there has been mis-selling, the primary reason for their historical success is that the with-profits concept - built around the idea that the fund provider smooths investment returns over many years - is actually what a many savers like and want to buy into.
Because no one outside the life companies seems to understand how the smoothing system is administered is not the fault of the with-profits concept. Most savers are attracted by seeing their money invested in a broad range of investment assets, with exposure to the equity market, but also protection against sudden downturns.
That future payouts on maturing policies are likely to be substantially lower than in recent years is not, as Mr Chapman concedes, the fault of the industry. It merely shows returns on all types of investment asset are likely to be lower for a time than they were in the exceptional years of the 1990s. In relative terms, most with-profits policies deliver returns that stack up reasonably well, and have done a lot better than unit-linked counterparts, where investors are exposed to the full volatility of the underlying investment returns.
The real trouble with with-profits policies is that they are no longer state-of-the art investment technology. Investors can, in theory, create their own smoothed returns today at low cost. To make them work involves a degree of discretion by the managers of the funds that many investors, after years of being kept in the dark, are no longer willing to accept. One key question in the debate is how far policyholders should be told each year what their underlying asset share in the fund is, so they can judge whether to stick with the policy.
Apart from the irony that the only major provider which regularly published asset share information to its policyholders was Equitable Life, the practical problem with increasing transparency is that it encourages people to over-react to incremental annual changes in the value of their funds. This is bound to add to the instability of the fund, and may not - for behavioural reasons - actually be conducive to establishing optimal investor welfare.
There is a fine balance to be struck between the need for transparency to protect investors and the need to dissuade them from hasty or ill-advised decisions on the other. It is not clear that the proposed "see-through" type of with-profits policy proposed by the Sandler Review has struck the right balance. The reality is that in most cases, with-profits policies will continue to deliver what they have always done, reasonable returns over time that are lower than they would be in an ideal world, mainly because of costs and the sometimes arbitrary cross- subsidisation of different groups of policyholders.Reuse content