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Pru keeping faith in with-profits

Who will be the winners and losers in the with-profits bond market?

It is a question that more and more IFAs are asking as some providers withdraw from the market.

Prudential is completely committed to with-profits and within the with-profits bond market to IFAs.

We intend to remain a leader in this market and are confident that with-profits continue to be a valuable way of saving. This is particularly the case at a time when markets are volatile and savers are able to benefit from smoothed returns.

Market volatility and issues of investor confidence underline the need for clarity and quality in all investment propositions and with-profits is certainly no exception.

In times of uncertainty in any environment, it is only the strongest that survive. We intend to remain a leader in the IFA with-profits bond market.

Industry figures believe that, with falling stockmarkets, IFAs have a need for clarity on the financial strength of with-profits providers.

By looking at free-asset ratios, the asset mix of funds, history on paying bonuses and the use of market value adjusters or withdrawal penalties, a very clear picture emerges of relative strength and with-profits fitness.

Advisers are being urged to demand clarity and explain to clients the importance of these product features.

IFAs and their customers need to ask many more searching questions of with-profits providers and demand more information than they have been used to getting.

When the bull market was running and returns appeared predictable and consistent, there was little demand for this information but in tougher times, the information necessary to distinguish one provider from another can be harder to come by.

With certain providers shutting the door to new with-profits business from IFAs, greater vigilance is needed from intermediaries and customers to ensure they choose strong providers which do not feel restricted in their investment strategy and the free-asset ratio is certainly one important indicator.

Pru has one of the highest free-asset ratios of 12.2 per cent in the marketplace while some providers have seen dramatic falls.

IFAs should be looking for free-asset ratios of 8 per cent or more and ensure that “future profits” are excluded in arriving at these numbers.

Asset mix also drives bonus policy. The fundamental issue is whether previous bonuses have been financially justified or have placed too much strain on the strength of the fund and its flexibility to meet future commitments.

Consumer expectations often diverge from market reality but consistently low inflation and investment returns are driving bonus levels down. The issue is one of consistency and predictability.

Are bonus levels fair and can an adviser be confident that bonuses will be fair in the future? A good benchmark is inflation – annual returns should still comfortably exceed RPI.

MVAs may also be increasingly important. The reality of tough market conditions is the need for some with-profits funds to find increased protection from a market value adjustment penalty. Again, the severity of these is often closely connected with the financial strength of a provider.

Advisers need to look to understand the level and nature of any MVA policy introduced and the potential for its future use. Clients need to know what penalties they may face for withdrawing their money.

In these demanding market conditions, the financial strength of providers is coming under much closer scrutiny and it is an indicator of the relative security of the players in the market.

The Sandler report is expected to place greater demands on the information provided by with-profits firms, forcing providers which have been less forthcoming with information into fuller disclosure.

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