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The decline and fall of with-profits

Is there any future for with-profits amid the gloom over falling bonus rates at most companies and the controversy over Standard Life? One glimmer of hope is that Prudential has been able to keep its bond rates on hold.

The Pru halted the slide of its annual bonus rates by keeping the present rate of 3.25 per cent on its Prudence bond. This contrasts with NU&#39s decision to cut bonuses for some with-profits customers. Bonuses on the majority of NU policies have been reduced and 100,000 investors whose policies mature this year will face final payout cuts of up to 10 per cent.

The Pru says in current market conditions, it can see no reason to make any more announcements on the bond&#39s bonus levels until February next year.

But advisers might not expect this kind of good news to spread across the market. Some feel that Pru, and the Pru bond, might warrant consideration as a case on its own outside of the rest of the with-profits market.

Wentworth Rose managing director Philip Rose explains why: “What Pru does not do is combine its bond with its endowment policies. I am not sure that you could apply the success of the Pru&#39s policy, which has attracted so much business, to other areas.”

It might also be that in the public&#39s perception that the Pru bond and “the plan from the Pru” are not associated with the tarnished with-profits tag.

Hargreaves Lansdown concedes that some with-profits policies are still paying out over asset share but the firm&#39s view is that there is no strong argument for going into with-profits compared with alternative equity investments such as equity income funds.

Pensions research manager Tom McPhail says: “With-profits will be around for a while but we predict it will be a slow, painful death.”

Rose says: “With-profits contains the germs of two products which have failed in the mind of the public – pensions and endowments. You may as well combine with-profits with a precipice bond element as far as they are concerned.

“Risk-averse investors like the idea of smoothing but there will only be a comeback for smoothed products when the Government overhauls pensions and product providers come up with innovative new plans.” He says because with-profits rely on the discretion of “actuaries in grey suits” and because public trust in financial service is at such low levels, there can be no significant comeback for these investment vehicles.

But what of the outlook for Standard Life? It has shocked the market with a review of its mutuality after facing tough new solvency rules. In November, the group&#39s accounts showed its future funds appropriations – one key measure of solvency – were £4.5bn against £3.2bn a year earlier.

The life office says it is “completely wrong” to suggest that it is in financial difficulty. Life industry analyst Ned Cazalet says Standard&#39s negotiations with the FSA hinge on finding an interpretation of reporting requirements which are set to come in next year.

Towry Law director Clive Scott-Hopkins says: “The raising of £750,000 of additional capital is to support new business and demonstrates that Standard do not have to demutualise in order to raise capital. However, reading between the lines, it appears likely that it will demutualise in the future as the amount of with-profits business underwritten is tailing off. With-profits business represented only 20 per cent of the total in the last quarter of 2003 and appears to be on a declining trend.”

Advisers seem divided on whether to stand by to Standard with new business or wait until the office&#39s future is sorted out. Rose has said that IFAs should not recommend Standard Life with-profits products until the FSA investigation has been resolved. He says IFAs should be wary of repeating an Equitable Life-style situation where clients continued to invest after initial solvency issues had been raised.

Other advisers are standing behind Standard Life. McPhail says: “I do not have a problem with Standard Life. It has a stable business, competitive products and a strong business plan outside of the question of whether it demutualises or not.”

Towry Law says it intends to continue to support Standard Life fully in terms of new business – with-profits and other products.

However, McPhail says: “I am a great believer in redemption but even major proponents of with-profits will acknowledge falling business levels and falling bonuses. So much has changed with the Govern-ment and others feeling that people should not invest in things where they do not understand the risks. This drive will mean that with-profits are left to die with a whimper.”

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