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I can see clearly now

“Not another article on with-profits,” I hear you groan. “I am bored with the issue and have not even met a client who is unhappy with his with-profits policy.”

I agree but, judging by current consumer comment, with-profits will probably enter the Oxford English Dictionary as a new swear word. Whether it is outrage at low bonus rates or the with-profits industry itself, support for with-profits appears to be at an all-time low.

Is this fair? Well, at the risk of sounding like an actuary – yes and no. It is true that bonus rates are low but, as with-profits is linked to the value of equities and other risk-based investments (depending on the investment fund spread), it is inevitable that returns will fall if equity markets dip over a sustained period. Lower interest rates also do not help.

No matter how much smoothing takes place, investments linked to markets which have languished over the last two years will inevitably decline.

However, it is fair to say that many consumers receiving bonus declarations are unlikely to understand how they affect the actual value of their investment. In many cases, the policyholder will need Delphic skills to divine how the bonus rate has been generated.

It is a combination of investment performance, the amount of money to be set aside for smoothing future returns and, oh yes, the annual charge. Those policyholders with the required psychic skills will easily dissemble this information. However, others will ask how the actuaries are deciding smoothing rates and will probably wonder whether their with-profits policy is hiding poor investment performance and high charges.

A key part of consumer disquiet is generated by a misunderstanding of how the product operates and the nature of with-profits risk. This is due partly to the way that with-profits is marketed as a simple way to invest in stockmarkets, even though the products are complex, and partly because stockmarkets were buoyant for many years, as were with-profits investment returns.

I suspect that, without recent poor returns, with-profits would have continued to receive extremely positive coverage. In Sir Howard Davies&#39 speech in February 2001 on the Future Regulation of With-Profits Business, he opened by drawing attention to the buoyancy and popularity of the with-profits market. He also warned: “It may well be that the high watermark of with-profits investment has passed [although] 5.2 million new policies were taken out in the year 1999.”

Davies was aware of the challenge facing the market – without transparency, any underperformance in the market may have a disproportionate impact on consumer confidence.

Like a financial Ghostbuster, Davies then set upon a path to remove the requirement to have extra-sensory skills to understand with-profits returns.

This spurred debate between those who believed that change was necessary and those who thought that many of the issues raised by the FSA were cosmetic. After all, they argued, with-profits are popular, have historically demonstrated good returns and can offer investment choice and a good way to manage investment returns.

Yet belief that the customer is happy just to receive an investment return at the end of the year and should not be bothered by how it is generated is a form of paternalism that is unacceptable.

With customer concern following the Equitable Life debacle, the reasonableness of Davies&#39 demands were bought into stark contrast. Jargon confuses consumers. There is indeed a need to improve the transparency of published information about with-profits funds and to provide better information for policyholders about the progress of their investments. Why should there not be greater clarity about investment strategies and the way in which terminal bonuses are determined?

In 2001, Britannic Retirement Solutions launched its with-profits annuity as a new model for with-profits in the 21st Century. It offers full operational transparency. Clients are now receiving their first annual statements that clearly set out the fund&#39s investment performance, based on independently reviewed figures, along with any changes to the following year&#39s income and the amount used for smoothing future returns.

Additionally, the annual management charge is capped at 1 per cent a year for the life of the annuity. There is also a guarantee that future income will not be affected by mortality risk, as Britannic is assuming the whole risk rather than the client.

We are convinced that this is the approach which must be followed by the rest of the industry. The challenge was to develop products along similar lines before the perception of with-profits changed.

With the first annual reviews of our with-profits annuity landing on the doorstep, we are satisfied that this product meets many of the concerns and needs of the consumer.

With-profits needs to be accessible if it is to be acceptable to the consumer. The penalty for failing to do this is to risk losing the consumer growth that has made this investment so popular.

As Sir Howard Davies said in his speech, some types of policies are clearly growth areas – sales of with-profits bonds reached £12bn in 1999. With-profits annuities are an increasingly popular means of seeking to maintain the real value of pensions.

The stakes are high – the very least that the industry can do is provide the consumer with transparency.

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