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Change old with-profits ways

It is understandable that the latest regulations for with-profits funds

under stakeholder require those funds to operate without being subsidised

by funds that have been withheld from previous generations of with-profits

investors.

To do otherwise would be contrary to the need for transparency which is at

the heart of stakeholder pensions.

Imagine the fog that would descend over such funds the moment assets from

non-stakeholder life and pension business and orphan assets are mixed with

stakeholder pension assets.

You can almost hear the reasons being given why it is impossible to

provide any meaningful information onthe performance of the assets

underlying the bonus rates that have been declared for the stakeholder part

ofthe business.

Although over the coming weeks and months existing providers of

with-profits funds will be expressing their clear preference to launch

their required new with-profits fund for stakeholder off the back of assets

from an existing fund, it is not essential to do it that way.

The latest regulations mean the traditional providers of with-profits

funds must forget their old ways and start again. A new millennium brings

with it the need for a fresh new approach to with-profits.

Skandia Life has already shown that this is possible. As it was purely a

unit-linked office, Skandia did not have an existing with-profits fund when

it launched its with-profits fund, the guaranteed pension fund, two years

ago.

Key aspects of the design of this fund, which are unfamiliar territory for

the traditional providers, are that the assets are ring-fenced solely for

the benefit of the investors in the fund and the charges are explicit –

both required under the stakeholder regulations.

In addition, all the available investment growth is distributed each month

as it is earned. Distributions are byway of bonus additions and each

addition increases the fund guaranteedto be available at the date selected

by the investor.

This aspect of smoothing out the fluctuations in the market is the key to

with-profits and the reason why it should continue to be an option for

investors in the future. The debate is not over the principle of

with-profits but howit operates.

A big advantage of this new approach of distributing all the growth is

that it does away with terminal bonuses. Currently, terminal bonuses on

other with-profits funds can be 100 per cent or more of the guaranteed fund

yet they are at the discretion of the life office and are only added on

exit from the fund.

This means investors have no idea how their investment is performing until

it is too late to do anything about it. The absence of terminal bonuses

means investors can plan for retirement with much greater certainty.

Skandia has chosen to price its with-profits fund for its normal

marketwhere the norm is the provision of independent financial advice for

individual investors. Sadly, this is one aspect that has been priced out of

stakeholder pensions through the imposition of the charge cap.

There is clearly no reason why other life offices cannot be equally

innovative and produce new-style with-profits funds. We look forward to the

rebirth of with-profits fit for the new millennium in a format that is far

more consumer-friendly than the current offerings in the market.

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