The FSA launched the public and industry consultation phase of its
with-profits review last week at an open meeting aimed at addressing the
Speakers were well weighted between advocates and critics representing the
main strands of interest from product providers to IFAs and the Consumers'
That so few life companies are prepared to publicise the return on their
with-profits fund is a disgrace. For far too long, life companies have
regarded the internal fund as their own personal fiefdom, where investments
could be made with impunity in an unaccountable fashion.
But there are some vital points missing. With-profits remains the life
industry's only unique investment product – its sole advantage over
specialist fund managers.
That some life companies continue to issue surrender values to investors
without pointing out the alternative courses of action smacks of contempt
for the customer. There are many who believe the growth in the secondary
market has dramatically reduced the traditional profit stream that has
traditionally flowed to life companies from such early surrenders. Is there
If life companies want to play the investment game – and with profits is
an investment product – they must match the disclosure and transparency of
the investment industry.
I do not put up the latter as a paradigm of pro-consumer disclosure but at
least an investor knows where his or her money is invested and the overall
aim of the fund's investment policy. Is it beyond our industry to move
beyond bland, often out of date statements about equity backing ratios to
actually tell investors the aim of the fund's investment performance year
on year against some measurable benchmark?
In framing bonus rates, among other things, an app-ointed actuary
considers the overall return on the fund and determines bonus rates to
ensure equity among different generations of policyholders in as equitable
a fashion as possible. Forgetting for now the nebulous, undefined and
self-regulated concept of “policyholder reasonable expectations”, why can't
our industry lead the debate and investor sentiment by benchmarking
with-profits funds, publishing and promoting annual returns for comparative
The recent actuarial joint paper goes some way to acknowledging such a
need but with fairly complex presentational consequences.
One crucial advantage of benchmarking is it allows analysis of surplus. If
life companies have belief in the product, let it speak for itself.
For a with-profits fund, any performance differential bet-ween the fund
and its benchmark can only have three contributory factors – cost of
guarantees, smoothing and investment under or over-performance.
Ironically, carrying out such an exercise may allow investors to more
appreciate the underlying strengths of the with profits concept.
Investment funds have the decency to inform their unit or shareholders of
the principal holdings and cash investments. Even if such investments
include misselling provision, new head office buildings or capital
injections into loss-leading subsidiaries or product lines, does the
ultimate source of the capital not have the right to know?
David Ferguson is a director of product design and marketing consultancy