The FSA is issuing a consultation paper on with-profits that could see new restrictions on market value adjustments and target payout ranges for maturity and surrender values.
The proposals, put forward by head of insurance firms division David Strachan this week, call for MVAs only to be applied when they are needed to protect the interests of remaining policyholders.
Under the proposals, which would take effect in March 2005, firms would be required to manage with-profits business with the aim of achieving their target ranges for payouts, taking into account the impact that future market conditions could have on their ability to pay.
Advisers and life companies say this could lead to a more cautious investment policy and lower headline rates of return.
Strachan says: “MVAs should only be applied in the event that they are actually needed to protect the interests of remaining policyholders.”
Clerical Medical pensions strategy manager Nigel Stammers says: “The difficulty with setting out target payout ranges in advance is that it becomes like a guarantee,creating problems like those with guaranteed annuity holders. This, in turn, will lead to less freedom to invest to reflect that risk.”
Wentworth Rose managing director Philip Rose says: “They seem to be looking at creating what is effectively a five-year smoothed managed fund. With-profits needs its tarnished reputation cleaned up but it is difficult when there are likely to be further cuts in with-profits bonus rates in the coming years.”