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Making the best choice

Recent events have left some life companies ailing and IFAs struggling to work out which companies to place business with.

Many IFAs recount a lack of confidence from clients and a general insecurity about the health of companies. They are also critical of the lack of information from the FSA.

Richard Jacobs Pension & Trustee director Richard Jacobs says it is an impossible situation: “I am accountable for the advice I give and put my head on the block, which the regulator will chop off if I get it wrong. But it is washing its hands of responsibility.”

According to the FSA, IFAs concerned about the solvency of life companies can go to Companies House and inspect insurance returns for the relevant company. These also detail regulatory solvency requirements, which are more stringent than those required by Companies House.

In response, IFAs point out they tend to be small firms without the resources or expertise to carry out full investigations of insurance companies. Wentworth Rose chief executive Philip Rose adds that IFAs are not actuaries or accountants. “We cannot be the masters of everything,” he says. Like others, he believes the lack of standardisation of solvency criteria such as free-asset ratios adds to the confusion.

Given recent stockmarket fluctuations, the FSA accepts it has had to monitor the situation carefully. The FSA refuses to comment on reports that some companies are reporting on a daily basis to the regulator. The recent stockmarket rally means some companies will have been saved by the bell but at the same time the serious weakness in the sector has been exposed.

An FSA spokeswoman makes the regulator&#39s position crystal clear: “It is not for the FSA to give specific advice to IFAs. We are not an advice shop. We do not operate a zero failure regime and we are keen for people to understand that. It is not our job to stop companies going bust – we are not shadow managing companies.”

Despite the example of Equitable Life, the regulator says it does not comment on individual companies – a stance which many IFAs criticise and is summed up by Jacobs: “If the FSA cannot give guidance, how can we?”

Others, such as Informed Choice managing director Nick Bamford, accept it is not for the FSA to give advice about individual companies but say it would be wrong if the regulator were privy to relevant information and did not divulge it to advisers.

In its recent investigation into the Equitable debacle, the actuarial profession said the company would have come under more scrutiny had it sold through IFAs. At the same time, the Faculty and Institute of Actuaries recommended life companies be forced to give annual accounts of their financial health.

The F&IA raises a related issue in its response to the Sandler review. In the current climate of uncertainty, brand strength comes to the fore. The FIA response says: “At times of stress, the public naturally tends to move to well-known and trusted brands.”

This, together with a lack of information on financial solvency, can skew the market, say IFAs. Many accept it could have the effect of hurrying along the long-touted consolidation of life companies.

Without definite knowledge of the financial strength of the pension providers, IFAs say they are forced into playing safe. Unsurprisingly, providers are reticent to disclose market share but Norwich Union and Standard Life have disclosed that together they have won nearly half of IFA stakeholder recommendations.

Jacobs suggests the regulator comes up with a standard reporting criteria which would make it easier for IFAs to make comparisons between the various life offices. Rose goes one step further, calling for the FSA to publish clear Standard & Poor&#39s-style data on the financial strength of the companies.

Ned Cazalet, who has car-ved out a niche as an analyst of life companies, gives the following advice. First, he says, you need to examine the liabilities of the company. The guaranteed annuity rates, misselling liabilities, with-profits guaranteed rates of accumulation of ailing life companies were all there to be seen in the last years, he says. Only once these liabilities have been calculated should you look at their assets. Then you need to examine the companies&#39 business strategy, new business and cash flow.

Cazalet accepts it is far from simple to look at the Treasury returns of life companies and a good degree of actuarial knowledge is required to wade through them. He also counsels people to be aware of assuming that big is safe. “The road is littered with high profile names. To think that a company is safe because it is a big name or has a TV campaign, or has done well in best-buy tables is crazy,” he says.


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