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With-profits without risk

Bob Bullivant

Corporate development director,

Britannic Retirement Solutions

Trevor Mitchell&#39s response to an article by Britannic Retirement Solutions chief executive Mike Fuller was published on the same day that BRS launched its revolutionary new with-profits annuity, which was designed specifically to add ress the issues raised in Tre vor&#39s article.

An annuity rate consists of only three factors – mortality, expenses and investment returns.


At the heart of our argument is the fact that the current generation of with-profits annuities passes the risk of longer life to the pool of policyholders.

We fundamentally disagree with this. The purpose of insurance companies is to take risk. That is how the client perceives our function.

It cannot be right to pass this risk back to the policyholder, which is why the Britannic annuity guarantees that no bonus adjustment will be made for mortality improvements.

We have no doubt that the mighty Prudential will be pricing prudently.

Trevor mentions the number of companies that have launched with-profits annuities.

Being a cynic, I wonder why so many do not compete in the non-profit market where they are forced to act as an insurer and take risk.

I also remember PHI, where new business was sucked in by companies entering the market with customers only to find that, at review, premiums often doubled.

I could also question that, if Prudential is so confident in its actuarial expertise, why does it not guarantee that mortality improvements will not affect bonus rates?

Perhaps the most disturbing feature is that clients buying with-profits annuities are probably not aware of the possible impact of mortality improvements on their annuities.


It is interesting that Trevor ignored Mike Fuller&#39s comments about the lack of transparency of charges in withprofits annuities. Perhaps he had the foresight to see the launch of the Britannic contract that guarantees a charge of less than 1 per cent a year for the life of the annuity.

Investment returns

The opaque nature of the return generated by smoke and mirrors at each bonus declaration has been commented upon extensively.

Trevor again did not comment. This was wise as the Britannic arrangement dec lares openly the annual return and the amount set aside for smoothing.

The real concern is not Prudential. It is that, in a crowded market, the lack of transparency of with-profits annuities will enable less scrupulous companies to generate quotes on a basis that looks good today in the knowledge that returns can be adjusted by future bonus adjustments.

This cannot be good for the industry. We cannot afford more poor publicity. In the pre-retirement market, charges have reduced significantly. Companies must not exploit the post-retirement market. Instead, post-retirement charging structures must be open, honest and fair.

Readers should recall that the industry does not have a good record for openness. I have already mentioned reviewable permanent health policies but I would also mention another arrangement where a benefit was projected using a bonus rate – the lowcost endowment.

The result was overopt imistic assumptions that produced ever lower premiums in an effort to produce new business and we all know how that episode ended – record fines and disgruntled policyholders.

I hope the industry will come to its senses and apply the same value, openness and clarify post-retirement as is now available pre-retirement.

My call is simple – follow the Britannic lead, with a transparent with-profits annuity with a clearly defined charging structure where the life company takes the mortality risk.

We are in the 21st Century and the with-profits concept must be dragged into this century or risk being a quaint but obsolete product of the 20th Century.


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