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A burning question

How many smokers pay attention to health warnings on cigarette packets? And how many with-profits bond providers will act on recent health warnings from the Faculty and Institute of Actuaries?

Not many – it would seem – despite the concerns of IFAs.

Talk to IFAs and they say they are looking to life offices for reassurance about with-profits bonds.

But product providers individually say the problem lies elsewhere and does not affect them.

The F&IA believes that some with-profits bonds are misleading investors with headline bonus rates, that reserves are not being set adequately and that there are issues over pricing and reserving implication on market value adjusters – particularly if there is a practice (rather than a guarantee) of non-application of MVAs.

The stock response from providers, however, is: “It does not affect us, it must be the other life offices.”

Yet the concerns raised in theF&IA letter are about current pract-ices, so someone out there must have prompted it.

DBS Network public relationsmanager Sue Lewis says the actua-ries&#39 letter raised important issues which have an impact on IFAs too. She says the network is looking to the life offices for reassurance.

Tenet Group technical support and research manager Jim Hall says the group is waiting for actuarial firm AKG&#39s findings on the financial strength of with-profits providers before takinga policy stance.

Hall says: “It would be too dangerous for us to make a decision on our own, that is why we have gone to the experts.”

The role that MVAs have to play in marketing literature has also come under scrutiny. Bonds may be marketed on their bonus rates but they are still an equity-based investment and the application of MVAs would inevitably affect returns. Recent market volatility could mean that MVAs are brought into effect.

Syndaxi director Robert Reid echoes the F&IA warning. He says: “MVAs are a safety valve for the providers and it is a concern that something they thought would never be applied might have to be used.”

It is also a concern that none of the providers appears to be examining their reserves in the light of this possible application of MVAs. Once again, the providers insist it is not an issue for them, but could be for others.

But the product providers do admit that there needs tobe transparent marketing literature and improved communication as a whole on with- profits bonds.

CIS general manager (marketing) Martin Clarke says: “With-profits bonds shouldhave clean, clear charges and features, with marketing support material written in plain English.”

So where is this consumer-friendly marketing literature?

Policyholder confusion could be further increased if the bonds pay out a terminal bonus after year one.

Friends Provident head of product development Jeremy Ward says: “Consumers have no real idea of real returns. It is premature to give bonuses after one year as this could imply the terminal bonuses will continue.”

The level and consistency of terminal bonuses can no longer be taken for granted. Scottish Life International marketing director Neal Lovett says: “Terminal bonuses always have been and remain a source of risk for with-profits bonds. A cut in the level of terminal bonus remains a serious investment risk for a number of clients.”

The low-risk, low-return reputation of with-profits bondsis also queried by Abacus director Philip Martin. By considering UK equity returns over the last decade, Martin believes investors would surely prefer a volatile 17 per cent return over a smooth 10 per cent. A tracker fund could have doubled returns for investors, he says.

Standard Life, however, is undeterred and has just launched its first with-profits bond. Yet it says it applauds the timing of the warning from the actuaries.

General manager (marketing) John Hylands says: “We did not enter the market some years ago because we were aware that some products were not what they were meant to be. Customers were viewing the bonds as a cash-secure investment, which they are not. We are very glad this has been made public.”

On the whole, the with-profits bond product providers claim they welcome the intervention by the actuaries.

Prudential retail IFAs e-commerce and marketing director Gavin Stewart says it will be good if the letter discourages what he terms as shark practices. He considers the move might have a small effect on the with-profits bond market in encouraging IFAs and consumers to go to stronger companies and push people towards the bigger product providers.

But not a single life company has said it will be taking action over the actuaries&#39 warning letter. It would appear that life offices tend to think it applies to someone else.

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