The report from the actuarial profession's working party on transparency and with-profits, published in January, is, predictably, nothing more than a whitewash job. It recommends little that will restore confidence in the industry following the Equitable Life debacle.
“It really means no change,” says an industry insider. “The recommendations to adopt a specific reporting model for with-profits is so complex that the average person still won't be able to understand it.
“Consumers will still have no idea of investment performance, bonus policy, or how charges are structured, because there is no requirement for charges to be explicit. Indeed, the report confirms that with-profits funds will still be able to apply charges retrospectively.”
The report does nothing to correct the abuses of with-profit funds which have been, and still are, widespread throughout the industry. The question of “ownership” of with-profits funds is not dealt with in the report and this is the crux of the problem.
To any investor, it is plain that the surpluses that have built up in with-profits funds belong to past, present and future generations of with-profit investors – definitely not the management or shareholders. No with-profits investor has been consulted about the level of retentions and none would willingly have agreed to the effective confiscation of more than £40bn of investors' assets.
The problem is that, under the guise of smoothing, life companies' actuaries have held back more profit than necessary and built up surpluses which are all too frequently raided to subsidise other parts of the business and to pay for expensive mistakes.
Such cross-subsidy is widespread and totally at odds with the original concept of with-profits. As one actuary put it: “The terms you are currently seeing for investment products in the marketplace are plainly uneconomic. With-profits funds are being used to subsidise this unhealthy situation.”
How can charges possibly be transparent so long as the actuaries allow business losses to be charged to the with-profits fund? Losses, as we have learned very expensively, can seldom be quantified in advance, nor are they usually expected. So there is no way they could be incorporated in with-profits charging structures. Raiding with-profits funds should be stopped immediately and made illegal.
Investment performance is difficult, if not impossible to determine. Charges are not clear and bonus policies are all too frequently totally obscure.
But the report makes no serious attempt to deal with these fundamental criticisms. Indeed, the report makes it clear that investors leaving a with-profits fund before their policy matures will not receive their full share of the investment return – a constant source of aggravation for withprofits investors. The actuaries are quite happy for this unquantified amount to remain for smoothing. This is an unacceptable situation.
The proposals for dealing with bonus calculations and allocation, one of the major mysteries of with-profits investments, are just another exercise in obfuscation. Consumers will no better understand this arcane subject in the future than they do at present.
Nor does the report deal with the fact that by far the greater part of the investment return on a with-profits policy comes in the form of the terminal bonus – which continues to be entirely at the discretion of the actuary. There are no proposals to limit the amount which can be added to the policy as terminal bonus.
It will be a great shame if the Equitable Life debacle has the effect of killing off with-profits investment products. But this document from the actuaries will do nothing to reassure investors or prevent the decline of the industry.
The Government should deal with the fundamental problem of “ownership” of with-profits funds and put a stop immediately to cross-subsidy by ring-fencing with-profits funds. The Government must insist that the surpluses are used for the benefit of the with-profits policyholders.
Second, life offices should be obliged to produce annual investment performance figures for their with-profit funds, showing all charges levied on the fund. They should also be obliged to produce comprehensible annual statements on bonuses with the actuaries justifying their stance.
Sadly, there is little realistic prospect of the Government doing anything at all to reform the with-profits concept – not least because it wants the life industry to promote stakeholder. With the 1 per cent cap on charges, the only way life companies can afford to do this is – yes, you've guessed it – by raiding the with-profits funds for the marketing costs.