Pastoral Care

As clients will be aware, I am keen on pastoral care and visit clients most weekends all around England. In many cases a meeting is simply to review existing investments with new investments unlikely. I also seem to end up paying for a pub lunch! But pastoral care is important and my target now is with-profits funds. My interest has been increased by a) taking over a client bank who seem to have a lot of with-profits policies and b) a recent report from our regulator, the Financial Services Authority, on the with-profits regime. One of its concerns is in the area of policyholder communications which I concur. Here is a reply from Prudential, one of the biggest providers of with-profits products, to my request as to how with-profits bonuses were calculated for one client’s pension fund:-

“Bonuses are a share of the profits and assets of the fund ???? When setting bonus rates we take many things into account, including:-

* Our charges and costs;

* Cost of guarantees;

* Payments made to shareholders (this does not apply SAIF fund or PIA as shareholders do not receive any of the benefits from SAIF or PIA);

* Likely future investment return on the fund;

* The fair and equal treatment of all policyholders;

* Smoothing;

* Maintaining the company’s financial security;

* The impact of tax on the fund’s profits and expenses is also considered.”

So what does that tell us? Not a lot and there is no doubt that with-profits is still an opaque investment. Managers of with-profits funds should be much clearer in stating how bonuses are worked out. Some life offices who have funds closed to new investment are very conservatively invested but in this particular case asset allocation seemed reasonable with around 25% invested in UK equities, 10% in other equities, 12% in property, 5% in alternative assets, 6% in cash and the rest in a variety of fixed interest securities mainly quoted in the UK and US.

Then we come to a particular problem concerning annuity quotations for with-profits funds. Quite rightly, the FSA or its predecessor, ruled that there should be common projection percentages to calculate the future monetary value of pensions. This edict was to stop rival life companies producing higher projections to attract business. But this idea does not work with with-profits. Once again in the case I am looking at, Prudential is quoting future rates of investment return of 9% and 5% until the pension starts and then 5.9% and 1.9% respectively afterwards. In this case those returns are nonsensical because the client, if he keeps paying in the same amount of money each month until March 2020, will be guaranteed a fixed money pension of £3,618.54 a year on his life only with no guarantee and no tax free cash.

The FSA really needs to look into the mis-match between annuity growth rates and pre-determined pensions.

So, generally speaking, with-profits funds should be exited. That’s not always easy because many impose early exit penalties or Market Value Adjusters/Market Value Reducers to make early exit painful. However, they don't always seem to be imposed consistently. In another case concerning investment bonds, investments taken out earlier seem to incur higher MVAs than more recently purchased bonds. All very strange but there is good news for some with-profits escapees – and that’s some policies such as Britannic/Phoenix policies offer no MVA escapes every 10 years and that 10 hears regime seems to be occurring over the next 12 months or so.