With-profits contracts are generally long term in nature. Over the term of the contract, policyholders are generally unaware of charges (implicit), investment performance (undisclosed), smoothing impact, incidence of market value adjusters and other factors which might affect bonus (for example, profit-sharing from other business sources).
A policyholder who takes out a 25-year with-profits endowment takes a lot on trust. It is surely not unreasonable that advisers can be informed sufficiently to be able to provide commentary on the likely development of bonus policy.
Over the last 25 years, there have been major changes to the ways in which life insurance companies operate. The high inflation of the 1970s and 1980s has come to an end. Traditional non-profit contracts have been replaced by more keenly priced unit-linked arrangements. Mutuals are a dying breed.
A traded endowment market has developed and surrender values (which formerly had draconian cancellation penalties) have needed to demonstrate better value on early contract termination.
All these factors have reduced the element of profit-sharing from other sources of business which with-profits policyholders have historically enjoyed. Further, the appointed actuaries are now likely to rely on asset share models to determine the calculations of terminal bonuses.
Consequently, it is the actual investment returns achieved on with-profits funds which are likely to be the principal determinant of the levels of bonus which each office can sustain.
Anyone who has worked in this industry will be aware of marketing performance which takes full account of unrepeatable factors. There is a willingness among companies to declare bonus for a period of time at levels which are higher than investment returns in order to show up well in performance tables.
If an office is propping up bonuses from reserves, current or prospective policyholders have a right to know to make a judgement about where to place their savings. How can financial experts assess this unearned support if investment returns are not disclosed?
With-profits contracts should play a valuable part in a long-term savings portfolio. But, following problems with mortgage endowments and the Equitable Life saga, with-profits plans are under pressure.
The contract is unlikely to survive unless its reputation can be enhanced. The best way to achieve this is by increasing the level of transparency – disclosure of investment returns (ideally voluntarily) would be a good step to take and is already best practice among market leaders. It would be better for the laggards to accept the inevitable with good grace. Compulsion will follow if they don't.
John Hastings Hymans Robertson Actuaries & Consultants,