Good news on with profits in 2006?

ReportInvestor

The Telegraph

Why does a policy maturing now pay out [9%] less than one cashed in 12 months ago when the underlying investments have generated a return of 17.7 per cent [in 2005]?

## - A good question.

"For starters, the "smoothing" process of with-profits means that some of the returns will be held back in good years to top up payments in bad years. However, investors will also have missed out on more of the stockmarket boom years of the 1980s.

John Lister, senior actuary at Norwich Union, says: "The policy taken out a year later will always be behind because it will not have benefited so much from the regular double-digit returns of the 1980s. This is because of the compounding effect of all of the good years early in the policy."

## - And the Norwich Union fund will have performed better than most because it is still open to new business and still has a decent asset mix including a decent proportion of shares and property.

It begs the question what will happen in a bad investment year, though.

ReportInvestor

Norwich_Union_Senior_Actuary wrote:

John Lister, senior actuary at Norwich Union, says: "The policy taken out a year later will always be behind because it will not have benefited so much from the regular double-digit returns of the 1980s. This is because of the compounding effect of all of the good years early in the policy.

Very misleading information from our actuarial friends :mad:

Get out your spread sheets for an illustration that is not historically accurate but shows he is talking out of his backside.

£600 pa invested each year for 25 years - one starting 1980-2004, one in 1981=2005.
12% growth pa 1980-89
5% 1990-95
10%1996-1999
10% falls 2000-2002
no change 2003
10% growth 2004
20% growth 2005

The one finishing in 2005 is 10% or £3K higher.

Is this actuary an idiot, or worse? Either way, investors have a right to be treated with less contempt.

Does NU mislead IFAs as well?

What do our IFAs think about the NU top man misleading the public, and the prospects for with profits endowments in 2006?

EdInvestor

ReportInvestor wrote:

"The policy taken out a year later will always be behind because it will not have benefited so much from the regular double-digit returns of the 1980s. This is because of the compounding effect of all of the good years early in the policy."

There's a variant on this they quite often trot out to explain poorer performance than might have been expected:

"A good year has dropped out and been replaced by a bad year."

You might like to try wrapping your spreadsheet around that one as well,RI.

#Of course we should always be aware that the "profits" bit of With-profits doesn't only refer to any money made in the stock or bond markets, but also to the profits or losses of the provider itself.

Many people don't realise that.

This does make it very difficult for any adviser to figure out what's going on with a WP policy. Especially when it comes to mutual lifecos (the majority until only a few years ago) which are not required to publish Profit and Loss statements at all.