Funds only to benefit marginally from rally

WITH-profits investors have been warned not to expect the rewards of the stock market resurgence when insurers publish their fund values and bonus payouts in the coming weeks.

Most with-profits funds lost between 10 and 20 per cent of their value in 2008, while restrictions on cashing in or switching policies – market value reductions (MVRs) – were increased.

Equitable Life kicked off the latest with-profits declaration season last week by announcing a 5.5 per cent jump in policy values that reversed last year's decline. But with Aviva following suit on Tuesday, Laith Khalaf, a pensions analyst at Hargreaves Lansdown, warned that returns would be modest.

The FTSE 100 rose by 27 per cent in 2009 but Khalaf estimated that the average with-profits fund grew by just 14 per cent last year. The "smoothing" process, in which with-profits funds hold back profits in good years to boost performance in more turbulent times, means the recovery in shares will not be fully passed on to investors. Khalaf said: "Exactly how much gets paid out and how much is kept in reserve will be down to the insurance company actuaries."

The prospects for good returns are reduced further by the low exposure that most with-profits funds have to equities. The Equitable fund, for example, can hold a maximum of 15 per cent in shares, while Aviva currently has just 30 per cent invested in shares, said Khalaf. "Something is better than nothing, but with-profits policyholders could have achieved better returns in other funds."

Standard Life and Friends Provident will declare their bonus rates and fund performance in the last week of January, followed by Scottish Widows and Legal & General in mid-February. Prudential will publish its figures in late February, and Aegon around 1 April.