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Industry&#39s divided over CII with-profits report

The news that a working party at the Chartered Insurance Institute fears yet another misselling scandal has sent shock waves through the industry.

An institute report exam-ining retirement planning advice standards claims with-profits annuities and income withdrawal could soon be subjected to sensational national press headlines as well as a possible review by the FSA.

The findings of the party have split the industry, with some labelling those leading the debate as scaremongers, while others are welcoming fresh attention to professional standards, hoping to nip in the bud the potential of yet another scandal.

Prudential Annuities marketing manager Trevor Mitchell says: “I think the situ- ation has been overstated but I am glad the CII has raised the issue of with-profits transparency. The public is familiar with the idea of with-profits but less clear on the detail.

“But there is a danger that we throw the baby out of with the bath water here. The reason with-profits annuities are so popular is because what is understood about them – they offer lower risk and charges than drawdown and the prospect of steadily inc-reasing income.”

Fearing the life indus- try faces loosing any of the ground it might have made in terms of cleaning up its public image, the working party is making a plea to life offices to take immediate action on particular bugbears.

It is clear that IFAs are central to its attempt to change the fate of the retirement planning advice timebomb, with the report&#39s con- clusion emphasising the need to raise competence standards in the retirement planning advice market.

So what exactly is the working party saying to cause the furore and where does this leave IFAs and their best practice and competencestandards?

Chairman of the working party and Evergreen Retirement Assurance corporate director Robert Bullivant told stunned delegates at an annuities conference last week that the £7bn retirement planning market is ripe for exploitation by life offices.

He expressed concerns that, faced with the extreme pressure placed on profitability by stakeholder, the retirement planning market could represent “the answer to life offices&#39 prayers” – an uncharted and vulnerable territory ripe for high and hidden charging, poor service and opaque returns.

Bullivant said with-profits returns and deductions are known only to actuaries, making it impossible for IFAs to make sound recomm-endations.

When it comes to income- drawdown products, the working party&#39s research uncovered a “worrying” lack of inv- estment in direct equities products and a bias for with-profits and fixed interest.

This is significant because it raises the alarm over whether a with-profits fund can meet the yield required given current investment conditions and also the strain placed on such funds by other factors, including the endowment issue, the pension review, guaranteed annuities and other potential review costs.

The working party also says it is concerned by the lack of self-investment facilities under many drawdown plans, claiming “a substantial number of clients are at the mercy of their chosen insurer and the ability of that insurer to maintain investment performance throughout the client&#39s life”.

Life offices are defending their corner in light of these criticisms.

NPI director of national accounts and corporate pensions David Tildesley says: “With regard to the criticisms of with-profits returns, I think appointed actuaries will be quite offended as they take a lot of care and attention. At NPI, we are as explicit about charges and deductions as we can be by including in statements, equivalent deductions and equivalent annual management charges.”

The CII fellows also claim life offices willingly use outdated projections on mortality to distort annuity rates to win market share, leading the working party to draw comparisons with low-cost endowments misselling, where over-estimated projections were used by some provid-ers and advisers to mislead customers.

Because of this, Bullivant has urged IFAs not to recommend annuities from certain life offices until they are satisfied with the basis of their mortality projections for with-profits annuities.

But Tildesley is unimpressed. He says: “We are slightly bemused by this. There are simpler ways to win market share than using old mortality rates.”

Also, the favourite of national journalists, commission, is back on the agenda with the working party scrutinising the levels earned.

Life offices and IFAs both come under fire in this respect, with the report arguing that certain products being favoured over others is because of “the potential product bias because of the initial commission structure of withdrawal schemes and annuities”.

The working party recommends life offices should reconsider commission struc- tures to promote ongoing advice and reminds advisers “renewal commission is a reward for ongoing advice not for past advice”.

It is argued that commission needs restructuring to promote regular reviews and give the industry “one less thing to be attacked for” by the national press.

Central to the conclusions of the report is a guide to IFAs. The working party seems to say advisers need to rise above existing life office bad habits by making an advice best practice model a reality.

The report recommends IFAs need a good knowledge of taxation, pension rules and legislation in order to advise.

For income-withdrawal products, it is suggested the client may need two advisers – one to advise on the risks associated with product choice and another investment specialist to construct a suitable portfolio.

Wentworth Rose managing director Philip Rose says: “I largely agree with a lot of the report. A particular area of concern in light of the findings is execution-only business, where you are told what the best annuity is but little else.

“You could argue this borders on the unacceptable. How will clients take account of with-profits? The suggested best practice model is an excellent idea and the way forward for this market.”


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