There is little doubt that the with-profits industry has entered a brave new world. The sharp downturn in stockmarkets earlier this year and increased market volatility have had a marked impact.
This has brought about the application of increased market value reductions by virtually every provider because of the need to responsibly manage with-profit funds for the benefit of all investors, whether they are withdrawing or remaining invested.
Some life insurers have closed or restricted investment into their funds. There has been no let up in the sustained media evaluation of the with-profits concept. Consumer groups and industry commentators have launched withering attacks on this type of fund. Some IFAs have even stopped recommending with-profits bonds.
But there have been certain welcome rays of light. It has been heartening for life insurers that the two most recent reviews of with-profits – by the FSA and Sandler – come out broadly positively towards the concept of with-profits.
A with-profits fund is essentially a managed fund with a smoothing mechanism. In simple terms, the smoothing mechanism allows investors in the fund to receive a return which is proportionate to the length of time that they have been invested in the fund and the average performance of the fund over that term. It is the essence of mutual investment philosophy.
Sandler and the FSA acknowledge there is an important place for this type of investment going forward. Sandler even goes as far as recommending a with-profits type investment product within his proposed suite of stakeholder products.
Of course we have also seen major recommendations about the way with-profits funds are structured within the insurance company's financial structure and about how funds are marketed. This first area is better dealt with by my actuarial colleagues.
Many of the problems encountered by the with-profits industry since the virtual universal application of market value reductions are due to a lack of understanding of how the products work – something the raising standards quality mark scheme is addressing.
Many investors may not have been fully aware of the possibility of the introduction of the MVR or understand why it is necessary to take this type of step. It is not helpful that the term “exit penalty” is often used interchangeably with MVR as this is not an accurate reflection of what is happening to the product. And the MVR is only part of the overall with-profits mechanism and should not be viewed in isolation.
As an industry we should work towards greater consumer understanding of all types of savings and protection products. It is only through achieving genuine consumer comprehension of what is available on the market and what each product can do that we can begin to eradicate the savings and protection gaps in the UK.
As acknowledged by both Sandler and the FSA, product communication is one area where the raising standards quality mark scheme can make a genuine impact.
In terms of with-profits in particular, companies accredited with the raising standards quality mark are obliged to provide comprehensive information about how bonuses are calculated and when MVRs may be introduced, bringing greater transparency. The good news is 34.5 per cent of the industry by market share is accredited. But there is a long way to go.
The concept of with-profits is attractive and likely to prove worthwhile for investors in generations to come – as acknowledged by the FSA and Sandler.
It is up to the industry to ensure that with-profits type products not only meet consumer investment need but through transparent marketing and communication help build consumer confidence in the life insurance industry. In this way we will all be a step closer to eliminating the savings gap.
Peter Dornan is director of group businesses at Aegon UK