An unremarkable sandwich lunch recently was spiced up wonderfully by the comments of an IFA who was wondering how to explain to his client that the with-profits endowment the client had taken out 25 years ago was now worth four times the original sum assured. Great news indeed.
The with-profits debate rumbles on, particularly with regard to stakeholder pensions. Does anyone now even know what with-profits means? Some of the issues are becoming clouded. Take a straightforward question: “Is the original value of my capital guaranteed?” The answer, “Yes, of course, with-profits offers smoothed exposure to the stockmarket, with the additional benefit of capital protection”, may well have been correct in the past and may be in the future – but only for some products.
More difficult questions have begun to emerge as various proposals for transparent with-profits come to fruition. Is it just me, or is the concept of a bonus that may actually be negative not likely to cause confusion?
I appreciate that this new transparency stuff has been forced on life offices by a combination of Government agencies, which primarily have the interests of consumers at heart, even where this is at the expense of IFAs and product providers. Perhaps before blaming the regulatory bodies for the tight controls around the new funds, someone should spend some time wondering why this has been necessary?
With-profits funds have tended to be marketed as a halfway house between cash and equities, offering the growth potential of the stockmarket but with the security of cash. Er, this doesn't work. The real challenge for the industry is to develop a product that delivers benefits based on the laudable principles of with-profits, which I strongly believe in, but in a transparent and well communicated way.
The recent report from the Faculty and Institute of Actuaries asked some fairly searching questions. I do not believe there is only one answer. To illustrate this point, consider the recent product announcements from Standard Life and Britannic, which both carry the with-profits tag. Without delving into detail, these are very different products and far removed from the plethora of with-profits bonds currently on the market.
To survive, with-profits must change, and it is already doing so. It must emerge from the transition with a more open, consumer-friendly face and, crucially, it does not need to be called with-profits. It is fast becoming a meaningless term that must be replaced before another generation of policyholders is misled.
An investor buying a UK equity fund has a pretty good idea of what is being bought. You can argue that different investment styles may be employed and that returns may vary, which is true. But nevertheless the fund invests in UK equities.
In the future, with-profits means nothing. It does not mean there is capital guarantee. It does not mean a bonus will be added each year. And, most crucially, the return is not linked to the profits of the life office.
For the sarcastic IFA who can apparently see no wrong in with-profits and still believes in the product, I have only one question. Perhaps with all of this new-found wealth your client will be rushing out to buy a Hillman Humber, presumably in the dashing shade of Dull Green?
If so, make sure he buys one with see-through windows, that he understands what he has bought, and that the badge on the bonnet fairly reflects the likely performance of his new vehicle.
David Ferguson is a director of product design and marketing consultancy, the abacus and can be contacted by emailing email@example.com. You can discuss the subject in the company's chatroom www.the-abacus.com/chat at 12 noon on Tuesday. March 27. Please bring a sandwich and your considered views.