The FSA report on closed with-profits funds provides no comfort for the millions of investors whose money in these funds is languishing, earning little or nothing.
About 66 with-profits funds out of a total of 110 funds are closed to new business and about £191bn of investors' assets are locked in, trapped by hefty withdrawal penalties of up to 25 per cent.
The one thing that the FSA report was right about is that the position of investors in closed funds is complic-ated. But someone needs to put the FSA straight on a number of issues because it looks as though, as usual, the industry is pulling the wool over the regulator's eyes.
It is no use the FSA saying that some of these funds have performed well over the past five years.
This is simply as a result of the fund managers switching out of equities and into bonds and fixed-interest inv-estments to match assets with liabilities.
This was luck, not judgement. It just happens that over the past five years, bonds have outperformed equities. This is unlikely to be the case in the future and investors in closed funds face a bleak future unless the equity content of these funds is increased.
The regulator seems to have swallowed what the industry has told it hook, line and sinker. There is a very simple solution to the problem which all investors would support – unitisation of the fund. This would ensure that everyone could get out without penalty and that everyone got a fair share of the fund.
But, of course, the life companies do not want to unitise because it removes their slush fund. Unitisation would do away with any possibility of them raiding the with-profits funds at some time in the future to subsidise other business or pay for their many mistakes.
The life companies are hoping to pocket hefty surpluses which will undoubt-edly build up in these closed with-profits funds if they continue to pay no bonuses and charge huge withdrawal pen-alties to those who get fed up and pull out.
Why the FSA does not coerce the life companies into unitising the funds is difficult to understand.
In its report, the FSA points out that its top priority is to ensure that policyholders are treated fairly and there could not be a fairer way of dividing up these closed with-profit funds than to unitise them.
Moreover, the FSA says that corporate governance is a big issue, particularly where closed funds are concerned. Life companies deliberately neglect policyholders in closed funds in the hope that they become so disillusioned that they eventually accept the penalties and pull out.
If enough people do this, it leaves the life company with a tidy surplus which they can use for other purposes.
Part of this strategy is to leave investors in the dark about what is happening to their money.
Lack of information is a big problem for many investors in closed funds and the FSA acknowledges that fact but simply telling these investors once a year that no bonuses will be paid is hardly an improvement.
The problem of closed funds typifies everything that is wrong with life company regulation and the existing legislation which governs life companies' activities and acc-ounting procedures.
All the time that the regulator and the legislation allows management to dip into withprofits funds – whether closed or open – to finance everything from marketing campaigns for other products to paying for misselling mistakes, investors are in danger of being ripped off.
With-profits funds should be ringfenced and, as far as the closed funds are concerned, unitised. This is the only way that these unfortunate investors will get a fair deal on their £191bn of assets. The life companies have no divine right to manage this money and investors should be free to take their money elsewhere without penalty.