With-Profits Funds Show Signs of Recovery as Exit Penalties Fall

The past two years have seen a decline in annual bonus rates on with-profits products, despite rising equity and bond markets. However, the rate of cuts has slowed, and life assurers have regained confidence to begin removing or reducing exit penalties. This shift is attributed to the rise in equity and bond markets since their nadir nearly two years ago.

Key Takeaways:

• Friends Provident has reduced its average exit penalties for with-profits investors to less than 10%, a decrease of 3-5 percentage points.
• Norwich Union has cut its exit penalties to 18% from 22% in the worst cases, although most policyholders will pay much less or no exit penalty at all.
• Standard Life has reduced its maximum exit penalty rate from 27% to 22%.
• The average with-profits fund now has only 34% invested in equities, with some funds having as low as 10-48% equity exposure.
• Liverpool Victoria has maintained more than 60% of its portfolio in equities, unlike other life companies which reduced their equity exposure to meet solvency regulations.
• Actuaries use discretion to "smooth" the effect of market falls on bonus rates and payouts to investors, meaning it will take time for market gains to feed through to higher payouts and bonus rates.
• A change in expectations of investment returns over the past 10 years, from double-digit growth rates to single-digit or negative returns, is also limiting payouts and bonus rates.
• Despite the challenges, with-profits funds have shown resilience, with some beating their closest competitors in performance over 15, 20, and 25 years, according to Money Management.

Statistics:

• Equity and bond markets are 1,500 points above their 2003 lows, but still 2,000 points below their millennial peaks.
• The average with-profits fund now has only 34% invested in equities.
• Norwich Union's four with-profits funds have equity weightings between 10 and 48%.
• Liverpool Victoria's payout on a 25-year endowment mortgage that is based on the with-profits fund's return dropped from £83,945 in February 2004 to £83,707 in August 2004.
• Over 15, 20, and 25 years, the average with-profits fund beat its closest competitors in performance.

Sources:

• Friends Provident statement, exact date not provided
• Norwich Union, "Market Value Adjusters reduced", 22 February 2006
• Standard Life, statement, exact date not provided
• Actuarial Profession, exact date not provided
• Ned Cazalet, independent life company analyst, exact date not provided
• Liverpool Victoria, statement, exact date not provided
• Ian Blanchard, group actuary at Liverpool Victoria, exact date not provided
• Money Management, exact date not provided