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MVRs illustrate all the defects of with-profits concept

In Inside Edge (Money Marketing, August 29),Peter Dornan seeks to justify the application of MVRs by the claim that “the MVR is only part of the overall with-profits mechanism, and should not be viewed in isolation”.

But it is the product providers who are viewing the MVR in isolation, to the detriment of policyholders.

What happened to the other elements of the plans that they promoted, such as the long-term view, the low risk, the ultra-shrewd investment managers, the reversionary bonus, which “once declared, cannot be taken away” and the emphasis on the smoothing process, which was supposed to even out the bad years with the good?

“It is not helpful that the term &#39exit penalty&#39 is often used interchangeably with MVR, as this is not an accurate reflection of what is happening to the product,” an argument which demonstrates Mr Dornan&#39s lack of concern for what is happening to the investor.

An example will illustrate this. In March this year, a leading life office declared a reversionary bonus for 2001 of 5.75 per cent payable on with-profits plans.

Any policy or bond in force for six years should, in principle, have been safe from any exit penalty by the terms of the policy issued.

But in August, the life office informed a policyholder that an encashment would be subject to an MVR of 6 per cent.

Nice distinctions in terminology have failed to convince him that there is any difference between the alternative forms of penalty.

The fact is that all the defects of the with-profits concept are encapsulated in the application of the MVR -it is arbitrary, obscure and entirely random in application.

Mr Dornan&#39s plea that the problems of with-profits “…are due to a lack of understanding of how these products work” is a veneer of self-interest that will be greeted with a hollow laugh by the holders of these plans.

James Redman

Libra Financial Management

Wembley

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