A few years ago, a product provider invited me to speak on the subject of investment and income drawdown. At that time, according to FSA statistics, the leading investment choice when taking the drawdown route was with-profits.
While I accept that Equitable skewed the figures, there were still an unacceptable number of IFAs suggesting that with-profits was the answer, irrespective of the questions posed by the client's income profile and term to final vesting.
The section of my presentation which focused on with-profits carried the title, With-profits – I Never Liked It Since I First Understood It. This was not my attempt to be headhunted as a headline writer for the News of the World, far from it, it was a genuine attempt to impress on others that a more careful scrutiny of with-profits was long overdue.
The recent history of with-profits has demonstrated the perils of a generic title being applied to a non-generic investment option. Don't get me wrong, I believe there is a place for with-profits in its purest form but that does not include the market value adjuster. Investors find the idea of smoothed returns highly acceptable but the use of the MVA makes a mockery of that concept.
Imagine for a moment that with-profits was a car. The car salesman would explain that the performance of the car was well in excess of the competition. What he would forget to mention is that the performance would not last if the actuarial mechanic was allowed to service the car. Once the actuarial mechanic had fitted the market velocity adjuster, the maximum speed would no longer be based on the original tuning of the car or its age and condition but remotely controlled by the actuarial mechanic.
Matters might then take a turn for the worse and the Government would compel a move to unleaded fuel (pensions compulsion being too difficult) which meant that performance would fall away even more. Customers would sue the car salesmen, arguing that they were missold the car and were never advised of the risks.
Motor magazines would turn on the garages, despite singing the praises of this car in previous issues. The fact that many of these budding Jeremy Clarksons had previously been in the personal finance sector was purely coincidental.
My comments on cars may be seen as inappropriate but then so were some of the actions taken by providers regarding with-profits.
A former product actuary at Equitable once suggested that MVAs were reasonable as they put the investor in the same position as they would have been had they been in an equity fund. When asked what was the point of investing in with-profits in the first place, he did not respond.
With-profits was a product designed for an era of low persistency where the number of maturing policies was in double figures only.
The game of telephone number projections which kicked off in the early 1980s created an illusion of expert investment managers. In reality, these plans were as hyped as the cars I talked about earlier. I can only assume that the hope was that they would not all be put to the test.
No doubt those fans of with-profits will be inspired to chastise me, suggesting that my analogy with cars is unfair. If with-profits in its current form lasts as long as my current car, then I may reconsider but I doubt that it will.