Take Offer or Continue with policy - Advice please

mblm07

Company - Pearl
Guaranteed sum assured - Sum assured £14,000
Target Amount - £40,000
Declared bonuses - Existing bonuses £10,577.18
Surrender value - £11,817
Monthly premium - £54.90
Maturity date. - 6th October 2013
Pearl Promise - Supposedly up to £6,200 if policy does not make target amount

Compensation Offer - Surrender value + £4743

Is anyone aware if this a good policy to keep or am would you recommend taking offer?, this policy is no longer used for a mortgage.

EdInvestor

Hi mblm



I'm sure dunstonh will be along shortly to give you some good advice as he's a bit of an expert on Pearl policies.

Suffice it to say that if you surrendered it and put the cash in the bank@4% also paying in the premiums to maturity, you should get 22,385.

Whereas if you kept paying in to maturity you are guaranteed to get 24,577 and this includes free life assurance. So it looks to me you'd be better off keeping it for once, just treating it as a savings account.:)

dunstonh

I'm sure dunstonh will be along shortly to give you some good advice as he's a bit of an expert on Pearl policies.

Thank you Ed. It does help having 4 ex Pearl area managers on my staff. We reviewed over 200 Pearl clients this year alone and the majority (but not all) cases led to the Pearl plans being changed. I now have other IFA firms and insurance companies coming to me for advice on Pearl contracts.

Pearl policyholders seem to be the average consumer but with strong loyalty to the Pearl brand. That loyalty should be disregarded. Remember Pearl is on its third owner in almost as many years. There is no loyalty to you as a policyholder.

The Pearl promise is worthless. There is no way they are likely to meet the criteria needed for the promise to make that payout. They are also unlikely to pay much in the way of bonuses in the future. My belief is that 4% would be a push and 0-2% is the likely figure for the next 10-15 years. They have changed their investment strategy and taken a little more risk. However, they themselves have said it will not benefit in the short term. 2013 maturity is short term.

I cannot post my report on Pearl on a public forum like this but it does end along the lines: "Whether or not clients should stay in these funds remains one driven by
individual considerations, the decision being a function of time to retirement/maturity, the presence of GARs, lack of MVA guarantees, client’s attitude to risk, state of
health (if any protection benefits involved) and so forth. WP clients with some
years to go and no contractual incentive to stay put should, however, at least consider their options"

In your case, there is no GAR, no MVR chargeable and if you leave now, there is no cost to you either as Pearl are paying the compensation. They only reason to stay would be if the life cover element is important to you due to state of health.

Ed check your figures again (I have shown my calculations below so you can check yours against mine and spot if its you or me thats made an error). I make it:
£5160 (using 94 ongoing premiums) + £4743 compensation + £11,817 surrender value = £21,720.

If you take the 11817 + 4743 = £16,560
16560 * 4% = £662.40 interest in year one.
for simplicity, ignore compounding and interest on monthly payments and have 662.40 x 7 years = £4636 interest.

Therefore making it:
£5160 (using 94 ongoing premiums) + £4743 compensation + £11,817 surrender value + £4636 interest ignoring compounding and interest on premiums = £26,356

With compounding, including interest on premiums and a bit of rounding down for 7 complete years of premiums and term remaining I make the figure: £27,203 at 4%

Better than the £22,394 minimum to be paid by Pearl.

In which case, assuming no life cover requirement, surrender would appear to be the better option. However, Pearl V2 Homebuyers did have no surrender penalty applied after 10 years. If you have a V2 Homebuyer and are in year 9 (for example), it may be worth waiting.

If you have any other Pearl plans, I recommend you see an IFA as soon as possible to review these. Ideally, get an IFA who knows a lot about Pearl policies as not all are bad. They tend to be either very good and worth keeping or very poor and need getting rid. There is rarely any middle ground.

EdInvestor

DH

I've excluded the compo money because on the basis it would be invested @4% in either case, it doesn't make any difference.And of course I only ever look at the outcome going forward on the basis of the surrender value vs the guaranteed value.

I would agree with you that Pearl will have a problem producing a 4% return and that 2-3% is more likely - the reason for this is because it has awarded higher guarantees to policyholders like mblm in the past than it should have done. But this is irrelevant to mblm's position of course because although his endowment won't make the target amount, he is guaranteed to get at least a savings account return, plus free life cover.

Offering guarantees that were too high up front as Pearl did, and not putting away enough money to cover them, is a major reason for a life company ending up in a zombie state like Pearl.But as the FSA has said, being in a zombie doesn't necessarily mean you should run for the door: as in this case, you could be in a comparatively good position.

dunstonh

Fair point on the compensation. However, if we compare like for like using funds from the same risk profile, the Pearl with profits fund is on par with a UK Equity Income fund. On that basis, in an ISA, 7% p.a. is within the potential and if it comes to a choice of Pearl or Equity Income fund(s) in an ISA. So a 7% projection should be used rather than 4%.

EdInvestor

dunstonh wrote:

Fair point on the compensation. However, if we compare like for like using funds from the same risk profile, the Pearl with profits fund is on par with a UK Equity Income fund. On that basis, in an ISA, 7% p.a. is within the potential and if it comes to a choice of Pearl or Equity Income fund(s) in an ISA. So a 7% projection should be used rather than 4%.

I'd have thought the Pearl WP fund is mainly invested in bonds rather than equities, isn't it?

If mblm originally invested in Pearl's With profits fund because he wanted the type of returns available for taking a risk in the stockmarket*, and if he still wants to go for risk-related returns, then he would indeed be best advised to cash in the policy and reinvest.

BUT since he has a guaranteed return with the policy which is superior to cash, tax free and not subject to interest rate risk, then I would suggest he keep the policy and looks on it as his cash savings equivalent, while devoting other money to any equity investment.

*Since mblm has received misselling compo, I rather imagine that it wasn't his original intention to take a risk.

mblm07

Thankyou for your comments EdInvestor and dunstonh, I really appreciate you taking the time to give my policy the once over. It is interesting how the Pearl glossary tends to suggest the 'Promise' is guaranteed, when it sounds like that is far from the truth.

dunstonh

I'd have thought the Pearl WP fund is mainly invested in bonds rather than equities, isn't it?

If mblm originally invested in Pearl's With profits fund because he wanted the type of returns available for taking a risk in the stockmarket*, and if he still wants to go for risk-related returns, then he would indeed be best advised to cash in the policy and reinvest.

Pearl carry a solvency risk and their with profits fund, with no MVR, is classed in the same risk scale as UK equity income funds. Staying with Pearl is not a risk free option.

BUT since he has a guaranteed return with the policy which is superior to cash, tax free and not subject to interest rate risk, then I would suggest he keep the policy and looks on it as his cash savings equivalent, while devoting other money to any equity investment.

With many other companies, I may have agreed. However, this is Pearl. Here is an opportunity to get out at no cost to mblm07.

*Since mblm has received misselling compo, I rather imagine that it wasn't his original intention to take a risk.

Perhaps not. However, going into equities or staying with the Pearl WP fund carries the same degree of risk. The only risk free option is pulling out of Pearl.

I would come out of Pearl unless the policy is in its first 10 years and its a homebuyer V2 plan and not a Homebuilder version.

EdInvestor

Pearl carry a solvency risk

Really.You surprise me. I remember the FSA required AMP (the former owner)to provide a large cash injection for Pearl before it allowed the flotation of the HHG subsidiary.I seem to remember the long suffering Australian shareholders were forced to stump up for yet another rights issue to pay for this cash injection.

This was designed to make sure all the Pearl guarantees were covered.[The Aussies had extracted (some might say "looted") large chunks out of the Pearl WP fund in the 1990s when people didn't worry about that sort of thing much, so they were made to put the money back.].

So I'd have thought Pearl would be OK - in bonds, with little growth expected,but not at risk. If there's a solvency risk, how come there's no MVA penalty stopping people from leaving? That's usually a feature of any WP fund that has a solvency problem.

Could you say who - or which organisation - provides this risk rating that the Pearl fund carries the same risk as an equity income fund?

dunstonh

Really.You surprise me. I remember the FSA required AMP (the former owner)to provide a large cash injection for Pearl before it allowed the flotation of the HHG subsidiary.I seem to remember the long suffering Australian shareholders were forced to stump up for yet another rights issue to pay for this cash injection.

This was designed to make sure all the Pearl guarantees were covered.[The Aussies had extracted (some might say "looted") large chunks out of the Pearl WP fund in the 1990s when people didn't worry about that sort of thing much, so they were made to put the money back.].

AMP extracted over a billion out of the Pearl orphan fund and Pearl with profits fund has been, in effect, bailing out NPI who would have gone insolvent without it. Remember Pearl did go insolvent for a short time in 2002 and AMP did need to pay some back. However, they never paid back anything like what they took out. Virtually all assets were sold as well.

The vulture capital company were ordered to do a solvency check and were forbidden from withdrawing any capital until the FSA had signed that off.

If there's a solvency risk, how come there's no MVA penalty stopping people from leaving? That's usually a feature of any WP fund that has a solvency problem.

To apply an MVR, you have to have it written into the contract. Pearl did not. The risk you have now is that as most policies have reached or will be reaching their 5th anniversary when exist penalties on most of the main contracts end. Most savings plans were 10 years and the last of those was generally sold in 1998. So, after 2008, the bulk of the fund is available to withdraw with no penalty and no MVR chargeable.

Could you say who - or which organisation - provides this risk rating that the Pearl fund carries the same risk as an equity income fund?

Most insurance companies, independent research companies and IFAs.

EdInvestor

I see, so what you're actually saying is that there's likely to be a run on the fund in 2008 and that it could fall into insolvency/administration as a result.

Interesting one for the diary

Since it's so well known in advance, one can't help but imagine that the FSA has an action plan in hand to deal with this one. But you never know - the UK regulator (or rather its predecessors) certainly has a history of flakiness well in excess of its counterparts in other western countries.

However, when you look at Equitable, which pretty well everyone knows has been insolvent for many years,despite the fact they deny it, it's still standing and still paying out guaranteed values at maturity.

So I wouldn't bet on there being a big drama at Pearl. Since it's now been taken over by a zombie consolidator there's no way anyone will ever know what's going on inside the WP fund ever again anyway.

However, I could see that mblm might feel he'd be better to take the money and run with this one, rather than risk getting tangled up with any nasty zombie stuff later on. If it were me I would probably take that view.I mean life's too short, don't you think?