View more on these topics

With-profits governance

The governance of a with-profit fund is not simple but can it be straightforward?

Paper 5 in the series of consultative papers published by the FSA as part of their review of with-profit funds deals with governance and the role of appointed actuary. In the paper the FSA proposes five options for the future governance of with-profit funds and all are worthy of review.

Option 1 would require the directors to define the principles and practices of financial management. This basically means that the principles and practices outlined in Issues Paper 4 would be implemented – which would be good news.

The concept of a principles of financial management document is not a new one. In recent years they have regularly formed part of the court documentation in support of the transfer of a business (for example, the acquisition of one company by another). The principles would presumably be long-term in nature (to reflect the business) and consistent with the company&#39s definition of policyholders reasonable expectations.

Publication would force all providers in this market to be open and transparent in their own aims and basis of operation. Who could possibly oppose such a move?

The possibility of policyholder representation on the boards of with-profit providers is the subject of Option 2. Such a move would have the apparent advantage of ensuring that policyholders were represented directly in Board discussions affecting with profits policies. But would they?

How would you identify the appropriate individuals and how would you select one? Would you need different representatives for different types of with-profit policies (as their interests could be conflicting)? Direct representation could have some benefits but the worst outcome I can envisage would be giving the appearance of direct representation without it being effective.

The third option proposed is that of a with-profit fund committee (either constituted separately from the board or as a sub-committee of the board). The role of the committee would be to monitor the areas where the directors have discretion. This sort of committee already exists in certain circumstances where demutualisation has occurred.

The FSA paper postulates that such a committee would add weight to the appointed actuary&#39s proposals on bonus rates etc but is this realistic? I am inclined to think that it would add little to the proposals of an appointed actuary, particularly once they had been independently reviewed by a peer.

I also wonder whether or not the Board would be happy to devolve such an important activity to a sub-committee. Would the full Board not wish to be involved?

Option 4 proposes that directors should have a statutory duty to have due regard to the interests of policyholders. The FSA appears to have included this option as a result of some responses to the initial discussion paper from May 2001.

The existing requirements of directors already place them in the position of having to take account of the interests of policyholders and extending these requirements might be worthwhile – but only if there was a scheme of enforcement and remedies to deal with breaches. The wording of Paper 5 suggests that the FSA is doubtful of the benefit of such a move.

The final proposal in the governance section of the paper is regarding the beneficial ownership of assets by policyholders. The issue being considered here is that, unlike a unit trust or Oeic, the assets of a with-profit fund are not owned by the investors. The pooled assets of the with-profit fund belong to the insurer not to the investors (although the investor has a contractual right to the policy benefits).

Amending the structure of life funds to give policyholders direct ownership would not be a trivial job. The paper highlights that there would be major technical issues and judicial process required for each company involved. This could only be justified if it was thought to be a major step forward. I can&#39t see how this could be the case.

It will be clear that each of the options in the paper need to be considered separately. They also need to be viewed on a cost/benefits basis. In presenting the options the FSA has taken due account of representation regarding the May 2001 document but has also been clear where it feels that action is not required.

Submissions were due to reach the FSA by April 12 – we look forward to seeing the outcome of the process.


Reducing the savings gap

I am delighted at the robust defence of independent financial advice by the Consumers&#39 Association.I also applaud their recommendation for a new maximum commission agreement. What a shame that previous governmental stupidity did away with the original. The current state of play confirms what the majority (of non-voters) believe – “it does not matter who […]

World Cup win &#39could put boot in to economy&#39

Success for England in the World Cup would be unlikely to stimulate the UK economy, according to Halifax.Although the economy tends to be more buoyant when England reach the quarter-finals, it is often fairly weak if the team progresses to the last four, its survey found.Halifax says the news will come as a blow to […]

Teps to rise in the fall

In September, an FSA rule change takes effect which will require life companies to inform clients who are considering surrendering their policy of the alternatives to surrender.This step is the result of investigations begun by the PIA and picked up by the FSA earlier this year when it issued Consul-tation Paper 106. This looked at […]

Widows improves website

Scottish Widows is revamping its extranet service next month with the addition of fund performance data powered by Morningstar.The site has been overhauled to give improved navigability, with more content available in front of the secure log-in.Morningstar will provide independent data analysis to help IFAs research and support investment decisions, as well as check […]

A DGT with 100% access and 100% discount?

Clare Moffat, Technical Manager, looks at the benefits of pensions from an IHT perspective. 100% access and 100% discount – what type of wrapper could this be? A pension! Post flexibility there is 100% access (for those over 55) and normally pensions are inheritance tax (IHT) free. With flexibility the options available on death mean […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm