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Take the rough with the smoothing

The moves by some life offices to cut final bonuses and reimpose market value reductions on their with-profits funds have been met with disappointment by advisers and investors.

Standard Life, Friends Provident, Legal & General and Norwich Union are among the life companies which have taken measures to guard their funds against falling stockmarkets.

Last summer, Norwich Union was one of the last providers to remove the remaining MVRs on its funds after it said that continued stockmarket growth had helped to improve the performance of its funds.

Barely a year later, NU has reintroduced MVRs ranging between 13 and 22 per cent on unitised with-profits investments in the CGNU, Nulap and Culac funds.

Chief actuary John Lister says: “MVRs are a mechanism to ensure that policyholders leaving or wanting to take money out of the fund do not take more than their fair share of the fund at the expense of policyholders who remain. This measure reflects our prudent management of the fund in extreme market conditions, ensuring that our with-profits customers are treated fairly and ultimately to protect the funds in times of market turbulence.”

Standard Life has increased and extended its MVRs and reduced final bonuses while Friends Provident and Legal & General have cut final bonuses.

Towry Law head of private clients Andy Cowan thinks the introduction of MVRs shows that investors cannot rely on with-profits funds to smooth investment returns.

He says: “Many investors may now feel trapped in their with-profits funds, facing limited growth prospects if they stay but significant exit penalties if they want to leave.”

Cowan advises all existing policyholders to review their with-profits investments as he thinks they are now an inappropriate strategy.
Fairinvestment.co.uk chartered financial planner Sharon Bratley says life offices are taking a short-term view and there never appears to be a good time for people to withdraw their money or for their policy to mature.

She says: “It seems to be a vicious circle. Cutting bonuses and introducing MVRs makes it impractical for people to encash their policies. By the time that markets recover sufficiently for bonus rates to rise again and for the companies to stop applying MVRs, markets take a tumble and companies take the decision to reduce bonuses and invoke MVRs again.”

AKG Actuaries communications director Guy Vanner says life offices have reintroduced MVRs quicker than they have done historically.
He says: “These conditions are exceptional and some of the falls have been unprecedented, so I can see things being done in a way that they have never been done before. Some insurers were very slow to impose MVRs and alter bonus rates in the past but now they are going the other way and responding more quickly.”

Vanner believes that MVRs are becoming much more of a feature of with-profits than they were historically. He says: “Ten years ago, they were an exceptional feature, now they are at the forefront of how it is managed.”
However, he suggests that because MVRs have been imposed quickly, they may be removed more quickly than in the past although he still thinks this will take years rather than months.

Despite controversy over the appropriateness of with-profits, Vanner points out that inflows of new money into policies have been steadily increasing in the past couple of years, especially into stronger funds, such as Prudential’s. He does not think the reimposition of MVRs and stockmarket volatility will damage the amount of new business coming into with-profits any more than it will damage investment business in general.

Informed Choice joint managing director Martin Bamford is surprised that new business in with-profits is increasing. He says: “I am shocked to hear that sales figures have been going up. I would be surprised if you could find any IFA who would admit to still recommending with-profits.”

He thinks it will not be long before other companies follow the big life offices by reintroducing MVRs and cutting final bonuses. He says: “People are going to be very disappointed. It is going to cause them to really take a closer look at why they are in with-profits. There are far better alternatives out there.”

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