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Skandia survey shows FARs from the with-profits crowd

Choosing a life office on the basis of its free-asset ratio in the hope of achieving higher returns is a lottery, according to research from Skandia.

Free-asset ratios are widely used as a measure of financial strength and often seen as a critical factor for many IFAs when choosing with-profits providers.

Skandia&#39s research shows a high FAR does not always mean high returns. It took the FARs of 20 life companies in 1985 and compared them with payouts 15 years later.

It found there is only a 3 per cent correlation between the figures. A 100 per cent correlation would mean FARs are directly linked to returns.

FARs are criticised by many as a crude measure and can be calculated in different ways, making them difficult to compare. But most agree financial strength is important so with-profits funds have investment freedom.

Skandia group marketing manager Peter Jordan says: “Most people&#39s perception is that free-asset ratios have a strong impact on results and financial strength is critical. The reality is nothing like that. This shows that the way the industry approaches with-profits is totally at odds with the results.”

Clerical Medical appointed actuary Adrian Saunders says: “Free-asset ratios are themselves a pretty blunt instrument. You have to look behind the headline figure. You do need enough free assets to be comfortable that investment freedom is not constrained.”

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