Equitable Life with profits pension / takeover.

[Deleted User]

Any advice or fund suggestions? Go with Utmost and move to a rock solid 3 - 4% return fund or stick with EL? I just don't need any more losses at this stage. Thanks.

1. Nothing has a guaranteed return in real terms
2. EL invested in bonds after the fiasco. It then got lucky (or we did). Bonds performed very well since 1990s as the interest rates kept dropping.
3. Past bond performance may not continue. EL may be forced to reduce payouts.
4. Buying an annuity would be the “safest” of all your options. There are still risks, but smaller than for alternatives.
5. Alternatively you could go for the cautious portfolio with 50% stocks and 50% bonds. There could be downturns but they will likely be very short.

JohnWinder

At 66 yrs old you might have a 25 year spending horizon, which means a 25 investment horizon, however much that should change in its return seeking and risk taking over the years. Two bad years at -10% is not relevant; that’s more the point.
But unless you’re got enough to sustain you with v low but safe returns (?1% above inflation) you’ll need some ’at risk’ investments. The apparently sensible consequences of this are that they should be: diversified among asset classes, within asset classes, across countries and ? currencies; low fee; passive (index tracking) not seeking to ‘beat the market’; preferably v liquid and understandable. Borrow ‘Smarter Investing’ by Tim Hale for a UK-centred exposition of clarity and well argued common sense if you can’t cogently argue in favour of all that.
Is Phoenix Phoenix Asset Management? In some countries fees like 1%+/yr would make people vomit. A little bit of ‘we’ve had enough of this’, and a little bit of moving funds to low fee businesses should eventually get a better deal. A quicker way to lower fees is likely to be by using passive index funds. If you’re not all over the active/passive debate try to be. For the average person it WILL improve long term returns and almost certainly cost you less. The annual SPIVA reports illustrate the former.
Good luck

archer123

John. Thanks for your replies. I gather you will be voting yes?

I think whatever I vote, I will have to make a decision anyway, some time soon.

I worry I have maybe too much equity exposure already, and liked the 'safe' element of EL. Sadly that all ends very soon.

My Phoenix fund is Janus Henderson Managed ex NPI. I also have large equity exposure in the US. As I am curently running down a large holding of IBM stock on the Corporate register, plus some other $ stocks.

I also have some exposure to Spain € with a Banco March Europa F1 (another dog) fund plus property.

Inevitably, I will have to decide how to invest after YE. So, based on what has been said, I may chance my arm with some holdings with Utmost/JPM. Maybe split Multi-asset cautious, MA Moderate, plus some UK Government bonds.

The remainder, maybe up to 50% (£75k), I'll move to a SIPP with AJBell. If they allow me to just move some.

Thanks for all your input. And good luck to everyone who has been on this long and arduous journey with EL!

[Deleted User]

I worry I have maybe too much equity exposure already, and liked the 'safe' element of EL.

If you worry now, then you almost certainly have too much equity exposure. In a way, having EL “guarantee” (or not) shouldn’t be the main issue. The main issue is asset allocation. The “fixed income” portion vs stocks needs to be right, be it 60% shares, 40% fixed income or something more conservative. The “fixed income” portion does not have to come from EL’s “with profit” fund. It could be any bond or money market fund you pick that suits your needs.

JohnWinder

My ’66 yrs old’ post yesterday was more to do with life cycle investing and Phoenix than EL.

My idle speculation about EL is that during recent years it has had decades of liabilities, and thus it has likely had long duration bonds as its investments (they’ve almost said as much). These have had good returns as yields were higher in recent years when these bonds were acquired. As those bonds mature and are replaced with now lower yielding bonds (and they’ve sold corporate bonds for government bonds), future returns should be worse - bad.
As EL can now offer a 70% uplift, this seems equivalent to reserves for 18 yrs of safe 3.5%/yr guarantees even with 0.5%/yr bond yields (EL says its 2018 return was .5%) - good, but that must include paying members some of that bond capital as no safe bond pays 3.5% these days - bad; and the uplift must surely include money reserved to pay running costs for years ahead - bad.
And if interest rates rise that bond capital will fall in value - bad; bond yields and their prices move in opposite directions. In all situations: capital return; interest rate rises, falls or steady, the long term future for 3.5% /year guarantees looks difficult with their (your) obligatory safe investment strategy.
Latching on to the only ‘good’, it might be tempting to stay with EL for 17 yrs (assuming no running costs?!) and get the 3.5%/yr, but then you confront the ‘tragedy of the commons’: from the last annual report, ‘However, there is a risk that capital distribution could be reduced or removed at short notice, for example, if policyholders remain with the Society for longer than expected when interest rates are low.’ So getting out earlier, during that 17 year period, could mean you miss any capital uplift, so perhaps you’d HAVE to stay for 17 years to get the full benefit now on offer?
Will running costs fall, or executives suggest reducing their own salaries (now north of three to four hundred thousand pounds)? Unlikely.

Buffa

You guys have been great.


I concur with JohnWinder and Mordko on how EQ (and we with-profits policyholders) have benefitted from the forced conservative investment strategy after the debacle. If much of the investment in bonds was is fixed interest, their value would have increased significantly as market interest rates fell. There is probably little further scope for such returns, only downside risk.


Much has been made of the 3.5% GIR for those who have it. Note that it applies to the Guaranteed Value; in my case this is less than the current value with the 35% uplift. The equivalent return on the full value with uplift is about 3.0% in my case. [Of course the 35% uplift might well change in the future (if the Scheme does not go ahead).] When I did a net present value comparison between the status quo and the proposed Scheme, assuming inflation remains at 2%, I could not get the NPV of the status quo to exceed that for the enhanced uplift with any reasonable assumptions. This conclusion effectively equates to your various time to breakeven exercises.


Since we received the papers at the beginning of August I have been considering what is in it for Utmost. Prompted by remarks in the post by Lieber7, I will set out my thoughts in a separate post.

Buffa

I think there are several areas where Utmost may look to make money. I have looked at three.


The first is through savings in management and admin costs, but this has been included on the credit side in the calculation of assets available for distribution (section 7.1.1 of the full Scheme of Arrangement expert report (KPMG) has an item of £222m titled Expense release amount).


The second is through fees (entry, annual and exit). There appears to be a commitment from Utmost not to change any of the present EL terms (except the removal or guarantees with the conversion to unit linked) for 1 year. Thereafter, there is some scope for increased fees but such changes could apply wherever we put our funds if we do not take an annuity. If the Scheme goes ahead, this risk would not affect those who transfer out of Utmost within a year of the transfer.


What I noticed about all the papers we have received up to now is that there is no clear definition of the way in which our with-profits funds are being used or statement about how the total distribution amount is to be calculated. Before I saw KPMG,s full expert report, I asked JLT Wealth Management several questions, the main ones being:
What is the minimum uplift which will be applied? The answer was that there is no minimum. Apparently lots of people have asked this. JLT agreed that it could therefore be zero. I think this is strange since while there is a time interval between the publication of the Proposal and the Implementation date, there is also a time interval (lesser) between the Calculation date and the Implementation date. In one case the risks are being allocated in full to policyholders so that, when they vote they will not know. In the other case the risk is allocate in full to EL / Utmost.
What is the difference between the published net with-profits assets as at the last annual report (to 31/12/18) and the total value of the uplift and what is the make up of this difference? JLT could not answer this and said they would ask EL. I was called back to say that no answer was available but that EL will write in 10 to 15 days once their actuaries had worked out the answer. 13 days later I received a letter from EL Customer Services making a general statement about the assets available being the total with-profits assets less the pensions business admin cost. No figures or further explanation was provided and no reference was made to other documents. I called JLT on the same day saying that I had received a reply but that it did not answer the question. I said that I was concerned that the 31/12/18 Annual Report showed a figure of £4,347m for with-profits assets (p87) but that the total uplifted policy value is shown as £3,894m in the table on page 27 of Part B. I asked where the difference was going but got no reply. After a receipt of a holding letter from EL, I received another which listed some deduction headings but without quantifying them. The headings were consistent with costs understood from the documents which have been made available but no figures were provided. My reading of the documents suggests that impact of three of the four headings is not very significant compared with the apparent £453m difference I want to be explained. I am not sure about the other (collateral for derivatives cover).

The responses I have had to these two questions are not satisfactory.

Buffa

It is notable that the full report of the Expert for the Scheme of Arrangement says in section 11.1 that it is not part of his scope to consider the agreement between ELAS and Utmost. Neither was it in the scope of Transfer Expert. We have not been told what is in that agreement and how it may throw light on the use of policyholders funds.


The full report of the Expert for the Scheme of Arrangement contains a table in section 7.1.1 showing the calculation of the assets available for distribution. This starts with "Own Funds" which has a particular meaning in the context of Solvency Capital Requirement and Minimum Capital Requirement. It is no doubt a pessimistic view of net assets, The value (£658m) can be found in the Solvency Financial Condition Report (SFCR) to 31/12/18. Although, some figures in the SFCR can be traced to the Annual Report, many others cannot.


Page 87 of the Annual Report is titled "Additional information for Members". The table starts with Total with-profits assets of £4,347m and ends with Working capital for fund of £814m. There is a deduction item titled "Other long term liabilities", of £210m which Note 13g on page 73 says is the discounted future cost of running policies etc. The value is the same for three different scenarios of capital distribution (but excluding the proposed Scheme). Presumably, with the Scheme, the discounted cost of running the policies would be drastically reduced. Any costs to be incurred by Utmost will be covered by their charges. Note that there is a negative item for "Future charges" falling to £76m for continuing (or continuing but increasing) 35% distribution; this is also a discounted figure for future charges in this case. If the discounted attributable costs of running policies after the Scheme is say £40m the Working capital for the fund would be £984m. This is a lot more than the £658m of the available finds calculation.


My questions are now, but remain unanswered: Are we being given all the information about how our (policyholder) funds are being used with the proposed scheme? and Should not the uplift be some £300m higher?

pafpcg

Buffa wrote: »

.....
What is the minimum uplift which will be applied? The answer was that there is no minimum. Apparently lots of people have asked this. JLT agreed that it could therefore be zero. I think this is strange since while there is a time interval between the publication of the Proposal and the Implementation date, there is also a time interval (lesser) between the Calculation date and the Implementation date. In one case the risks are being allocated in full to policyholders so that, when they vote they will not know. In the other case the risk is allocate in full to EL / Utmost.
........

What are these risks to which you refer?
If the risk is that the Equitable with-profits fund may reduce in value, I thought that Equitable had taken out insurance against a drop in the value of their investments (announced earlier this year at the time of the initial news of the take-over). I wonder if the cost of that insurance is in the list of deductions under the heading "collateral for derivatives protecting high asset values"?

One cost element we do know is that 1% of the potential uplift was sacrificed to pay for the helpline and subsidized advice.

Thanks for your efforts in digging out this information.

Buffa

I meant that, at the time they vote, policyholders are taking a risk on the value of the uplift which they wont know for sure until later. I do not know at what point after the second court hearing EL will advise policyholders what their uplift will be (precisely). Between that date and the implementation date (1 January 2020). EL / Utmost have a risk of a financial setback but, as you indicate, this risk may be covered by insurance.