Jeff Salway: Millions warned over policies

WITH-PROFITS policies couldn’t be much less fashionable, yet millions of investors still hold such investments – and many are set to suffer further losses.

Over the past month, some of the biggest with-profits providers have unveiled their latest performance figures and bonus payouts, and the picture they’ve painted isn’t pretty.

With-profits policies, which hold back investment growth in benign markets to bolster returns in rockier times, are used as the basis of pensions, savings and mortgage endowments.

The Equitable Life debacle, an endowments mis-selling furore and a steady decline in the performance of with-profits policies have tarnished the brand over the past decade.

Yet, with up to 20 million policies still active and more than £330 billion held in with-profits funds, experts warn that many people are missing out on better returns elsewhere by failing to review their failing investments.

More than 1.6 million investors hold with-profits policies with Edinburgh-based Standard Life alone, including around a million with pension policies and 600,000 with endowments. About 44,000 of those mortgage endowments are set to mature this year.

Around 750,000 of its policyholders in unitised life plans and unitised pension plans have been hit with bonus cuts of 0.5 per cent, the group revealed in its latest update last month, while 98 per cent of its 500,000 mortgage endowment policyholders face shortfalls.

Aviva last week cut its payouts by similar amounts, and Legal & General has reduced regular bonus rates while raising total bonus payouts.

Much of the controversy in with-profits in recent years has surrounded “closed life” funds run by Phoenix Life, which has six million customers who originally bought their policies with groups including Scottish Mutual, National Provident and Pearl.

Its figures, published last week for the first time, show that many of those six million customers are getting poor returns on their investments, with some receiving growth of less than 3 per cent a year for 25 years on their endowments.

A 65-year-old man investing £20 a month for 20 years with National Provident (now managed by Phoenix) has seen the value of his policy plunge by almost half since 2006, according to research last year by Money Management magazine.

In many cases insurers have cut their payouts after shifting more money into cautious, low-growth assets in a bid to shield policyholders from market volatility.

Iain Wishart, owner of Wishart Wealth Management in Edinburgh, said: “Many with-profits plan holders now have an investment that bears little or no resemblance to the fund they originally invested in. The asset mix is such that many with-profit funds will no longer participate to the same extent in any improved stock market conditions.”

So with the with-profits bonus season under way, now is the perfect time to review your investments.

One criticism levelled at with-profits is the difficulty in working out how much a policy is really worth.

“What you will receive back from a with-profits plan is unknown until maturity. Ultimately the returns are decided at the actuarial whim of the insurer,” said Wishart.

That’s because insurers apply what they call “smoothing” – holding back gains in some years to shore up the fund in more bountiful times. Yet the calculations used in this, and, therefore, in working out regular and final (or terminal) bonus payouts, are opaque at best.

There are several factors to look at when working out whether you should wave the white flag on with-profits.

Many plans include guarantees such as guaranteed annuity rates, while some older policies may promise annual increases of up to 4 per cent. With annuity rates at record lows, these guarantees are more valuable than ever and may make it worth holding on until the end of the term.

Then look at the bonuses your policy pays and its value. The only true current value of your policy is the current surrender value, according to Brian Steeples, managing director at The Turris Partnership in Glasgow.

“This takes into account the current value of all annual bonuses to date, together with the current value of the terminal bonus,” said Steeples.

To complicate matters, however, the bonuses are often expressed as a projection of their value at maturity, rather than as a current value, according to Steeples.

“If all insurers quoted the current surrender value of the with-profits policy in the annual statement, everyone would be able to make an informed judgment as to how the policy is faring year on year,” he said. “Sadly, to the discredit of the insurance industry, this is not done.”

Also look at the financial strength of your provider and its asset mix if you want an idea of the potential for future growth. The strongest performers are those with sufficient capital adequacy to remain invested in the higher-risk, higher-growth assets. Between 2000 and 2010, the equity weighting in the average with-profits fund more than halved to 33 per cent.

If there are no guarantees to hang on for and it’s clear that you’re set for a significant shortfall, turn your attention to the cost of getting out of the investment. Most with-profits funds impose an early exit penalty in the form of market value reductions (MVRs), although many with-profits bonds become MVR-free from the ten-year anniversary.

MVRs are generally lower now than following the bull market of the early Noughties, and some providers have withdrawn them.

However, where they do apply they can take a significant chunk out of the value of the investment – in some cases enough to make it worth waiting until maturity.

Independent financial advice can be invaluable when reviewing your policy, not only to ascertain whether you should surrender it but also to look into alternative investments.

Steeples said: “A good independent adviser should be able to create a much more tailored solution for an investor’s needs. A tailored portfolio will almost always be better.”