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Look beyond headline rants on with-profits

As a long-term champion of with-profits annuities – Prudential Annuities introduced them to the IFA market in 1991 – I was naturally concerned to read the headline, CII warns of looming with-profits scandal, in the October 12 issue of Money Marketing.

Unfortunately, the CII report to which this headline refers is not yet published so it will not be possible to look at the detail for some weeks.

Certainly, the three-page executive summary that is available now suggests the full report contains a far more balanced view. It concludes: “An annuity provides an insurance against the financial effects of longevity and its absence could harm rather than benefit many older people.”

At present, it is the headlines and soundbites that catch attention, so let us look at what has been said so far.

The CII report says: “The with-profits market is ripe for exploitation through high and hidden charges, poor service and opaque returns.” Added to this is the accusation that companies are using outdated mortality tables.

There is no denying that the workings of with-profits funds are
not clearly visible but this does not mean they are bad value. With-profits annuities provide pensioners with the chance to benefit from equity growth and, hence, income growth with an appropriate level of risk and income stability.

Another way of looking at this is to consider the alternatives. Unit-linked annuities are more transparent, so why are they not more popular?

The answer is that the investment risk is inappropriate for many older people and the income fluctuates with unit prices. In this respect, with-profits annuities are hard to beat and a better way of linking annuities to equities has not yet been found.

But, what about “high and hidden charges” and “poor service”?

The debate about stakeholder pensions and with-profits funds has flushed out many issues about charging and the ABI&#39s Saltr initiative is tackling the issue of transparency.

As for service, I am not sure in what way the service for with-profits annuities is supposed to be any different from the service on other type of annuity. In fact, across the industry, the level of service for all annuities has improved greatly over the last 10 years.

What about the use of “outdated mortality tables”? The main annuity providers have been aware of the trends in increased life expectancy for some time and regularly adjust for this.

There have been a number of high-profile reports on mortality and the Institute of Actuaries continuously monitors improvements in longevity. To suggest the actuarial profession and annuity providers do not take mortality seriously is a complete nonsense.

My view is that, rather than concentrating on the few negative aspects of with-profits annuities, the industry as a whole should look at finding ways to better communicate the advantages of annuities.

Just as important is the need to promote better advice. It seems there is still more homework to be done before agreement can be reached about what constitutes better advice and so I, for one, am keen to see the detail of the CII report&#39s best practice model.

One of the most powerful ways of answering the charge that with-profits annuities offer “opaque returns” is to look at the returns they actually have delivered over the last 10 years.

These reflect one of the key advantages of with-profits annuities – they decouple the link between annuities and gilt yields. Let us not forget with-profits annuities solve many of the problems asso-ciated with traditional gilt-based annuities.

With-profits has a good reputation with the public for steady long-term performance and it is a shame headlines like these undermine this confidence.

There is a real danger of denying access to a tried and trusted investment medium which is so suited to the income needs of many people in retirement – the very people the CII seeks to help.


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