The Faculty and Institute of Actuaries has raised the alarm over the marketing of with-profit bonds, prompting fears of a repeat of the endow-ment crisis.
In a letter obtained by Money Marketing, the F&IA voices its fears that consumers are being misled by headline bonus rates in life offices' marketing literature and are ignorant of the actual rates their with-profits bonds are paying.
It claims there is a mismatch between perceived bonuses and life office reserves and it is warning this imbalance must be addressed.
The F&IA brought the endowment market to its knees in November and could now be set to torpedo the with-profits bonds market. It summoned life office appointed actuaries to London at the end of June to discuss what action should be taken.
There was unanimous agreement on issuing a position statement on best practice.
A letter went out on June 30 from F&IA life board chairman Charles Thomson, warning that reserves need to be set to reflect consumer expectations, particularly if clients have received advice indicating, in certain circumstances, MVAs would not apply.
The reserves necessary to cover this will be substantial, according to the F&IA.
The letter says: “There are also concerns about the pricing and reserving implications of office practice on market value adjustments, particularly if there is a practice (rather than a guarantee) of non-application of MVAs.”
KPMG principal consultant John Jenkins says: “It all comes down to the sales end of the process. There could be problems there.”
Syndaxi director Robert Reid says: “With-profits bonds are fine as part of a well structured portfolio. The concept they can deliver all things to all people is fundamentally flawed and in some cases this has been ignored by practitioners.”
Prudential retail IFA marketing director Gavin Stewart says: “I think it could affect a limited number of offices. Those that don't have enough financial strength could find themselves in trouble if they have to increase their reserves.”