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With-profits will ride out storm

2001 saw the kind of stockmarket upheaval that traditionally has sent investors towards the perceived safe haven of with-profits and an unprecedented level of criticism directed at the product.

Despite all the negative publicity, the amount of money put into with-profits soared to £15.2n in 2001, a rise of £2bn on the year before, according to figures from the ABI.

At the start of 2001, with-profits came under attack from the Consumers&#39 Association and the Faculty and Institute of Actuaries issued a report into how the concept could be make more transparent. Then the FSA stepped in, conducting its own investigation of with-profits.

Above all, the subject of with-profits elicited some bar-bed comments in Paul Myners&#39 report into institution investment. His references to opacity and commission bias led to Ron Sandler conducting a similar review of the retail savings industry and with-profits is clearly in the firing line. Nevertheless, the money has continued to pour in.

Speaking at a roadshow last week, Prudential chief executive Mark Wood said the combination of CP121 and Sandler makes for interesting times and major challenges but with-profits are too important to be killed off.

Prudential UK actuary Tom Imber says he is concerned about what the Sandler review is going to come up with. He says: “Sandler is going to have to do something to get his knighthood. We have told Sandler that charges and commission on with-profits are not high. After seven years, a unit trust is more expensive in terms of commission when you take trail into account.”

Wood says that, given the amount of money put its way and the length of time it is invested, the commission is not unreasonable.

With an extra £2bn going into with-profits last year, the total going into Pep transfers and Isas by IFAs went down to £4.3bn from £5bn in 2000.

But IMA head of communications Clare Arber says comparing the two is like comparing apples and pears. She says one is a 25-year longterm savings product with an average amount of over £50,000 whereas funds held in a unit trust are held for an average of eight years and if wrapped as an Isa have an upper limit of £7,000.

As for the increased marketing of, for instance, corporate bond funds, Arber claims these are as much aimed at investors fighting shy of equ-ity unit trusts as a pitch for the with-profits market.

Imber has only a very simple ambition for with-profits – he says it should better putting money on deposit.

The popularity of with-profits for IFAs and their clients is undiminished and the scrutiny from the regulator and the Treasury review is unlikely to leave the product unchanged.

FIA deputy chairman of the life board and Standard Life finance director John Hylands says that, as a result of the FSA review, with-profits is going to change in terms of the way its providers have to report to the regulator and in the information given to consumers.

But this will affect potential returns. Hylands says: “We have a general concern, which the FSA seems to share, that companies will either reduce guarantees or restrict investment freedoms or both. We could be left with a product where there is greater certainty but less earning potential.”

He does, however, suggest that if commission levels were capped, this would go some way to countering this problem. He says: “If commission were lower, early and indeed all surrender values would increase.”

Despite any changes, Hylands believes the product has a healthy future.

“Once all the dust settles, so with-profits will continue to have a very important role to play, giving consumers some equity exposure but protecting them from the extremes of the stockmarket but with a greater understanding of how it does so,” he says.

The ABI figures show not only that the appetite for withprofits continues but that money is being channelled into the hands of a few providers.

Norwich Union almost doubled the amount of with-profits business written last year, up from £1.6bn in 2000 to £3bn last year.

Prudential, traditional stalwarts of the with-profits bond, were pushed into second place, selling £2.1bn-worth of with-profits compared with £2.7bn in 1999. Standard Life also saw a dramatic increase in business – up to £1.4bn from £384m. Legal & General and Scottish Widows also wrote over £1bn of with-profits business.

IFAs suggest these figures reflect a desire for safe havens not only in terms of the with-profits concept but also through placing business with the companies they feel are most financially secure.

Consultant Ned Cazalet notes Equitable Life was once one of the major providers of with-profits bonds, saying that its collapse may account for some of the new business. He also points out that writing large volumes of new business can bring its own problems.

But Hylands says the life companies have become a lot more sophisticated in recent years and that these problems are too well known to cause serious difficulties.

Cazalet&#39s advice to IFAs is to ignore traditional indicators such as free-asset ratios and instead examine the financial strength of the with-profits provider in the same way they would if they were buying shares in the company.

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