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Outside Edge David Ferguson

The FSA launched the public and industry consultation phase of its

with-profits review last week at an open meeting aimed at addressing the

key issues.

Speakers were well weighted between advocates and critics representing the

main strands of interest from product providers to IFAs and the Consumers&#39


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&#39s 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

a link?

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&#39s 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beyond bland, often out of date statements about equity backing ratios to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&#39s 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&#39t

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

the abacus


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