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Friends hits the rough on smoothing

Friends Provident says it has only limited ability to smooth its with-profits fund but argues that the real benefits of such funds comes from asset diversification.

However, IFAs claim that without the benefit of smoothing, with-profits has little advantage over other types of investments.

Friends group finance director Martin Jackson says the company is financially strong without significant debt on its balance books and with the capital to write new business. But he accepts that the current free-asset ratios reflect a short-term blip, painting a stronger picture of life offices following the FSA relaxation of resilience tests.

Friends has just 45 per cent of its with-profits fund invested in equities while 12 per cent is in property and the rest split between fixed-interest, cash and other investments.

Jackson says: “We have only a limited ability to smooth. The smoothing element of with-profits is likely to diminish. The real benefits from with-profits come from having a diversified asset mix.”

The Abacus director Philip Martin says: “It is an about-face. Life firms have spent years extolling the benefits of smoothing. They have being paying out bonuses that have been artificially high for far too long and are finding it difficult to bring them down in a smoothed manner.”

Franklins Financial Services partner Neil Franklin says: “What a can of worms he is opening up. If you take away smoothing, what are the benefits of with-profits? You cannot control asset mix, charges or benefits.”

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