The rich seam of business made up by the billions of pounds of policyholder money in closed with-profits funds is attracting increasing numbers of prospectors.
In recent weeks, several with-profits closed books have changed hands, with a clear group of back-book admin specialists starting to emerge.
Swiss Re's Admin Re operation last week paid £333m for 800,000 Windsor Life policies with total assets of £5.2bn, adding to its purchase of Zurich Life Assurance.
Chesnara, demerged from Countrywide Assured, has just outsourced its admin to Marlborough Stirling and Britannic Group is redefining itself as a runner of closed books.
Abbey is reported to be preparing its accounts for a possible sale of its Scottish Mutual and Scottish Provident closed with-profits books, and Resolution Life, fronted by former GE Insurance Holdings chief executive Clive Cowdery, is looking at buying Royal & Sun Alliance's closed with-profits business.
Figures from Ernst & Young's 2003 capital and solvency review show that the number of with-profits funds accepting new business – defined as companies where at least 40 per cent of liabilities are in respect of withprofits business – has more than halved from 39 in 1999 to 19 in 2003.
Ernst & Young partner Tim Roff says: “Difficult trading conditions over recent years have focused the attention of many insurers on the continued viability of their funds to accept new business. In particular, the obligations of writing business with some form of guarantee have become increasingly burdensome.”
Last March, when Britannic decided to reposition itself as a closed fund manager, it estimated that closed life and pension funds represented £170bn of assets. The firm says this could double within two years, leaving one-third of all life and pension funds in closed funds.
One life office analyst says the catalyst for the recent buzz of interest in closed books is the work that life offices have been forced to do in relation to the realistic reporting regime.
Previously, anybody buying a closed book might have been concerned at what skeletons might fall out of the cupboard years down the line, the realistic reporting regime means that buyers can be more certain that the liabilities which the fund carries are properly matched with assets.
With such a huge amount of money effectively trapped in funds with high exit pen-alties and opaque charging structures and with a risk profile that no longer matches what was originally intended, the risk of consumer detriment is clear.
Consumers' Association senior policy adviser Mick McAteer believes the problem of the vulnerability of policyholders trapped in closed with-profits funds will be one of the biggest issues for the industry in the next few years.
McAteer says: “Existing policyholders in closed with-profits books are among the most vulnerable consumers around. My fear is that if a predator wants to buy a closed book, they must see some advantage in it for themselves. We are not confident that there are enough safeguards in place to protect those in closed funds because there is not enough transparency.”
Britannic says there should be no difference in the service and return that policyholders should get, regardless of who owns the book.
Head of corporate communications Julia Mackisack says: “Policyholder guarantees such as sums assured and the accumulated annual bonuses relating to their policies are always protected. Owners of closed funds care as much about policyholders and policyholder returns as owners of funds who attract new business.”
But McAteer is concerned that while closed books owned by high-street names face a reputational risk if they squeeze their trapped policyholders, third-party administrators without the same concerns over brand could be slower to lift market value reductions and increase charges.
Hargreaves Lansdown head of pensions research Tom McPhail argues that something should be done to help policyholders in closed with-profits funds.
He says: “Some of these closed with-profits funds are run on the absolute minimum expense that the owner can get away with. The third-party administrator is only interested in generating a nice annual income from running the book. Maximising the investment returns is way down the administrator's list of priorities.”
The CA is pushing the Treasury for an independent inquiry into the plight of investors trapped in closed with-profits funds. The CA wants the Government to look at whether it is reasonable for people to be offered a reduced MVR to allow them to get out and place their funds elsewhere although it accepts this would give rise to huge complexities when making sure the position of policyholders who remained in the fund were not left short-changed.
The CA is also calling for a Government public awareness campaign to tell people how they can get out of their funds and it wants providers to make it clear when penalty-free exit periods come up.
McAteer says: “People thought they were getting into one sort of investment but they are now trapped in something completely different.”
McPhail says: “It is not unreasonable to ask for some way out of these closed funds. The risk profile of the funds has changed beyond all recognition from what people originally bought into.”
With so much money at stake, the story of closed with-profits funds is set to run and run. Whether the Government can satisfy everybody remains to be seen.