From Adviser Guide: With-Profits
What are the cons of with-profits products?
There is a lack of transparency in how the bonus rates and investment mix are decided that will deter yet more customers.
With-profits funds have been tainted by poor performance and returns that are enough to put off most clients, but there is a lack of transparency in how the bonus rates and investment mix are decided that will deter yet more customers.
As products they are not the most malleable, with fixed maturity dates and guarantees that cannot be changed.
Policyholders in unitised with-profits funds can also be subject to hefty penalties for customers who exit early if the fund’s board considered this was necessary to protect the interests of remaining policyholders. These charges are called market value reductions (MVRs).
“This is not a penalty,” argues Kevin Arnott, with-profits actuary at the Phoenix Group, “rather it is an adjustment to ensure that the surrender value reflects the market value of the underlying fair share of the assets at the surrender date.
“To pay more than this would potentially be unfair to the remaining policyholders in the fund.”
Paul Fidell, senior investment business development manager at Prudential, adds that these charges can vary from product to product and between product providers.
“The cost of setting up new with-profits policies is considerable and therefore, in common with many other types of investment, there may be a range of charges applying to investors who surrender their policy before certain contractual dates.
“In addition, as with-profits is a pooled investment, it is imperative that all policyholders are treated fairly and equally and that policyholders exiting a fund do not receive more than their fair share.
“That is why MVRs were introduced, to deal with a situation where the face value of an individual’s policy is greater than the actual value of the underlying assets over the period the policyholder was invested.
“Without this reduction, the exiting policyholder would be taking more than their fair share of the fund.”
With-profits penalties can be avoided, though. Many funds aren’t currently applying market value reductions (MVR). On funds that are, there are often MVR-free windows – these can be at a set anniversary, typically on a bond this might be at its tenth anniversary of inception, at agreed periods thereafter, and on the death of the policyholder.
On pension policies there is often a window around the selected retirement date. Penalties can be avoided if the policy is kept to its nominated maturity date.
There, Mr Fidell concludes: “With-profits should be considered as a medium to long-term investment to be held for five years or more and so the MVR charge would not currently apply if our existing MVR policy is maintained.”