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Worrying estate of affairs

The Treasury select committee’s report into inherited estates has varying potential repercussions for the market, according to IFAs.

The report by the influential group of MPs, published last week, could impact on the proposed distribution of the inherited estates of Norwich Union and Prudential. Prudential announced last week that it would not carry forward plans to reattribute its £8.7bn inherited estate.

On another level, it could further dampen consumer appetite for with-profits.

Informed Choice joint managing director Martin Bamford says: “The key thing about investment is the availability of information and clarity of information for investors. Unless that is available, then it is virtually impossible for the adviser or client to make a proper decision. It is likely that the with-profits vehicle would just fade away – long term, it is just not a sustainable investment option.”

Baigrie Davies director Amanda Davidson says some of the TSC’s concerns about with-profits as an investment vehicle are at best naive.

She says: “I think the TSC is not up to speed. If you ask most IFAs when they last recommended a with-profits policy of any sort, you would have a lot of head scratching going on because with-profits is not recommended as it was 10 or even five years ago. That was when with-profits bonds were the corporate bond-type option in terms of the asset allocation of a portfolio but that is no longer the perceived wisdom. And when did someone last do a with-profits endowment? With-profits is naturally dying out.”

Davidson says that what is more of an issue is not more new business being done but those people who already have with-profits endowment policies and what they do about it. She says: “The danger is with-profits policyholders picking up on something as high profile as the TSC focusing on with-profits and thinking they should cash in their policy, which is not necessarily what they should do.

“It is a bit late once people are invested to say it is not very transparent and perhaps they should not have it because investors are already into a contract and there may be penalties or market value adjusters for coming out, or both.”

The other party of people for whom there could be serious fallout from the TSC focus are shareholders. Davidson considers that this focus not entirely fair and that the call for shareholders to bear responsibility for compensation is misguided.

She says: “There is this view that shareholders are these hugely financially wealthy people who can sustain all this but actually a lot of shareholders are just small individuals where the value of their shares hardly matters.

“Should they be required to bear all this responsibility? If you are a small shareholder, you probably have about as much knowledge of the company’s working as you do if you are a with-profits policyholder. It is quite a complex subject and certainly not a case of just saying the shareholder should be responsible for compensation claims.”

Hargreaves Lansdown pensions analyst Laith Khalaf says the TSC report is a timely one and could have big implications for NU.

He says: “NU is definitely going ahead and it is just a question of ironing out the principles it is going to use to distribute the estate.”

While it is too late for the inherited estates of Standard Life and Axa, Khalaf believes the Norwich Union distrib-ution may well be affected by the report.

He says: “For Norwich Union, there is a cloud of uncertainty over its distribution. I would say Norwich Union was in a difficult situation at the moment because it is halfway ahead with the debate with its policyholder advocate Clare Spottiswoode about how the estate should be distributed and then there is all this clamour from the TSC about the principles underlying that.

“The TSC is pretty much asking the FSA to pull something out of the bag by the end of 2008 so it is asking them to move pretty quickly and consult on some of the practices that occur when distributing the inherited estate. That could have material impact on the Norwich Union distribution and perhaps even their decision to go ahead with it.”

Another view is that the market is long due some severe challenges.

Worldwide Financial Planning managing director Peter McGahan says: “I wrote over 11 years ago about with-profits being the most obscene idea and it is only because the insurance companies have a stranglehold on these arrangements that they still exist.

“With a with-profits fund, managers produce the returns and decide how much of those gains they give to the investor. As an investor, I would like to decide what to do with my money. It is nothing more than an opaque, obscure product. Under treating customers fairly, why would anyone market that contract?”

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