With-Profits: An Impending Crisis ??

Academic

An interesting piece in the Sunday Times 'Money' section today regarding with-profits funds.

The article highlights a "get out of jail free card" clause (known as "spot guarantees") which will enable investors to take their money out on the 10th anniversary of the bonds start date without incurring penalties or MVR's.

The article also has a link to an organisation called 'Exit With-Profits' that has written an interesting document called With-Profits: An Impending Crisis.

It was an interesting read as I'm currently trying to decide whether it is worthwhile starting an AVC into the University Superannuation Scheme and they offer Prudential with-profits as one of the available funds. In light of this report (even though Prudential seem to fare reasonably well) I think I'll be giving the with-profits fund a wide berth.

whu

Yes read that - very informative especially the bit about £120 bn being worse off than if saved as cash over the last 10 years

EdInvestor

Academic wrote: »

The article highlights a "get out of jail free card" clause (known as "spot guarantees") which will enable investors to take their money out on the 10th anniversary of the bonds start date without incurring penalties or MVR's.It was an interesting read as I'm currently trying to decide whether it is worthwhile starting an AVC into the University Superannuation Scheme and they offer Prudential with-profits as one of the available funds.

The spot guarantees would not apply to AVCs, endowments or pensions, only to with profit investment bonds at some companies.

Academic

EdInvestor wrote: »

The spot guarantees would not apply to AVCs, endowments or pensions, only to with profit investment bonds at some companies.

Ed, thanks for the clarification. The article, in typical journalistic fashion, does mention "with-profits plans, including endowment, pensions and bonds" but on more careful reading of the piece the paragraph in question is more of a general comment regarding the large numbers of people invested in WP's rather than an explicit comment on spot guarantees.

The tone of the other report (the 'With-Profits: An Impending Crisis') is still alarming. The fact that a lot of WP's plans are far from transparent and may have large exposure to equities is potentially worrying . I for one assumed that WP's policies were a safer bet than investing directly in funds, it would appear that this isn't necessarily the case.

As with so many things in the financial services industry it would seem that the usual caveats appy:

1. Do your (own) research;
2. Let the buyer beware;
3. It doesn't necessarily do what it says on the tin;
4. Get professional advice........;)

dunstonh

The tone of the other report (the 'With-Profits: An Impending Crisis') is still alarming.

Isnt that what the media does though? Take stories and try to scare you?

Most with profits funds in the industry are invested with financial solvency in mind rather than rate of return. There are really only two viable with profits funds left and the rest are mostly on run down.

The Pru WP is one of the best there is. It went through the dot.com crash very well (which saw a similar sized market crash) and its going through this one well. As of date, Pru (not including Scot Am) have yet to fail to hit target and pay surpluses on endowments. Whilst no-one knows the future it wouldnt be fair to compare the likes of Pru against the naff NPI, pearl and Phoenix WP funds. Although being a media article, they wont make that distinction.

I for one assumed that WP's policies were a safer bet than investing directly in funds

They are. Problem is with profits is not one beast. You have conventional with profits (ugly and lacking transparancy and unitised with profits (better, still not perfect). With unitised with profits the value of the units cannot drop. Whilst an MVR can be levied in the interim, it cannot at maturity. Any final bonus can fluctuate but it cannot go below zero so worst case scenario is that you cannot get back less than you pay in. In good times, you are not likely to get back more than directly investing in equity funds but in bad you cannot drop as much either.

Academic

dunstonh wrote: »

.....it wouldn't be fair to compare the likes of Pru against the naff NPI, pearl and Phoenix WP funds. Although being a media article, they wont make that distinction.

{My emphasis in bold}

On the contrary, it clearly makes the distinction between 'Good', 'Median' & 'Poor' providers of WP's (see page 22 of the report). It places Prudential in the good category and the others you mention (NPI, Pearl & Pheonix) in the poor category. It also makes the point, however, that nearly 75% of the Pru's WP assets are held in shares & property and the recent volatility in the markets may have hit them harder than some other providers.

The 'With Profits: An Impending Crisis ?' report has been written by an organisation (DMP Marketing) that purports to "inspire, inform and educate individuals about a range of financial products and in a number of areas." Whilst I'm pretty sure that they aren't exactly impartial (after all they would like worried WP's policy holders to undertake a 'with-profits audit' via their affiliated IFA's ) the report does make interesting reading.

If you have the time (and the inclination) I'd be interested to have your view, as an IFA, on the general tone of the report.

EdInvestor

Academic wrote: »

The tone of the other report (the 'With-Profits: An Impending Crisis') is still alarming. The fact that a lot of WP's plans are far from transparent and may have large exposure to equities is potentially worrying .

The problem is the opposite: the reason they are not performing, cutting payouts and terminal bonuses is because many of them haven't been invested in equities much for the past 5 years. Equities are not the only assets to have fallen in value recently and they have missed the period when equities were growing strongly.

The WP crisis actually took place in 2003, whenh the regulator finally woke up to the risks the insurers were taking and forced them to reserve in safe assets for their guarantees.Many have been closed ever since, only a couple are now worthwhile of which the Pru is one.

rosy

Having read this thread I am a tad concerned about where these WP plans will end up & wondering whether it would be best to cut my losses ( have had a with profits plan with Standard Life for about 15 years & it hasn't made anything over that time, maturity date is in about 8 years). There is no exit penalty at the moment & also no additional terminal bonus at maturity ( there is a bonus each year which is still there, albeit less than last year ). It also has a life assurance element which we don't really need. Also it's a closed issue.
Would there be any obvious disadvantages in cashing it in and going for tracker S&S ISAs with it? If so, how do you choose a provider? We aren't desperate for the cash & not sure if this would be like selling at the bottom but equally I don't want to end up shelling out for another 8 years & regretting it having read this thread.
Thanks.