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Why IFAs need bonus details

Do annual bonus declarations on with-profits funds tell us a great deal about recent investment performance?

Annual bonus rates this year are likely to remain unchanged or fall because yields on gilts and equities have fallen. This provides relief for actuaries as financial reserves are replenished.

UK pension investments, including those supporting with-profits, will show returns of 15 per cent per annum or more over the last three years. If you ask exactly how much, life offices are normally very defensive and may not provide the information, saying it is irrelevant or, if supplied, would confuse policyholders! The fact that this is essential information for IFAs is dismissed.

There has been much debate about the use of with-profits for income withdrawal. Marketing departments of with-profits providers offering income withdrawal understand the need to provide a reasonable income and maintain high capital values to support the three-year review.

One leading company in the sales brochure states: "We may award more of any profits through annual bonuses and less (if any) through terminal bonuses." Will the actuary be willing or able to support the marketing message, the needs of the contract and the aspirations of the investor?

During 1998, the early participants of income withdrawal will have their first three-year review. The rate for determining the maximum withdrawal available for the next three years will almost certainly be reduced, perhaps by 15 per cent, unless the capital fund has increased. If the income-withdrawal investor has upwards of 25 per cent in with-profits, there could be a problem. The fact that a large hidden reserve might have been set aside will provide little comfort and no income. Does this mean that there is no place for with-profits as an investment within income-withdrawal arrangements?

This would be a pity since with-profits provides stability while allowing investors to remain invested in real assets. However, in a period of falling yields and substantial capital gains, perhaps each three-year period should be reviewed.

A possible solution could be a special bonus, if justified.

Example, if the annual bonus rate for the last three years had been 7.5 per cent and the average investment return 15 per cent, a special bonus of 25 per cent of accrued bonuses could be paid. This would still allow a reasonable amount to transfer to reserves. The amount of any final or terminal bonus would be reduced to take account of any special bonuses that had been paid during the term of the contract.

Income or fund withdrawal is a new concept with special requirements. Unitised with-profits could have a useful part to play, provided that IFAs are given some reasonable guidelines about bonus distribution policy. Actuaries have to be prudent and cautious but, if with-profits is being made available for income-withdrawal contracts, there also has to be flexibility

Tony Kinsey

Tony Kinsey Financial Services

Smallwood, Cheshire


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