In spite of Legal and General’s announcement last month that it will add its with-profits fund to a list of those closed to new business, AKG Actuaries and Consultants argue that with-profits funds have an increasing role to play in today’s retirement product market.
Guy Vanner, managing director of AKG, said that over recent years with-profits funds have closed, due to changing appetite in the product mix, financial strength concerns and de-risking.
However he said a number do remain open, dominated by the Prudential, which he added has been able to demonstrate both the “strength and capability to continue to offer and further develop with-profits as part of its product mix.”
FTAdviser can reveal that just 14 providers remain open to new with-profits business, with three of these firms set to consolidate business with bigger partners, following on from L&G’s exit last month.
The 14 groups that remain open to new with-profits business include: Aviva, Engage Mutual, Foresters Friendly, Friends Life, LV, NFU Mutual, Police Mutual, Prudential, Royal London, Scottish Friendly, Shepherds Friendly, Standard Life, Teachers Provident and Wesleyan, according to research by AKG Actuaries and Consultants.
However, three of these firms are in the midst of plans to consolidate their businesses with bigger partners; Engage Mutual with Family Investments, Friends Life with Aviva and Teachers Provident with LV.
But Mr Vanner said that indications in the changing product landscape today are that with-profits may have an increasing role and has potential growth for those able to still offer it.
He said: “There is some indication, from providers going back and undertaking client need research afresh in looking at changing their at-retirement propositions, that many of the characteristics at the heart of with-profits are actually what customers fundamentally want, e.g. smoothing, diversification and some presence of guarantees.”
Following L&G’s fund closure, Prudential said in a statement: “With-profits investments are hugely relevant to consumers who are looking for consistent, medium to long-term returns and access to a wide range of asset classes, according to Prudential which has assets of £72bn in its With-Profits fund.”
AKG Actuaries and Consultants research also shows that Prudential dominates the market for new with-profits business, with a market share of more than 75 per cent in 2013.
Vince Smith-Hughes, Prudential’s head of business development, said: “With the forthcoming launch of PruFund through an Isa proposition, we continue to develop new with-profits propositions to give customers a wider range of multi-asset investment opportunities to suit their changing needs.
“Next month, as in previous years, we expect to announce consistently strong returns once again for millions of conventional with-profits customers in our annual bonus declaration.”
Despite deciding to close the door to new business, Jackie Noakes, managing director at the mature savings division at L&G, added that with-profits remains a “good choice for investors seeking steady growth from a spread of investments over the longer term with some downside protection”.
“Many of our with-profits plans benefit from valuable features that may be lost if a customer surrendered their policy and took their plan elsewhere.”
However Ned Cazalet, chief executive of Cazalet Consulting, said that the move by L&G was completely expected and in line with the current state of the market for with profits funds.
Mr Cazalet said: “If you went onto their [L&G’s] site a year ago and tried to find anything on with-profits [in terms of how to invest into them] you would not be able to - so this is unremarkable - it is entirely expected.”
Mr Cazalet disagreed that people would move out of the fund simply because its closed, saying that there was no material change to the fund.
He added: “With-profits as whole - the market was very substantial 15 years ago and now it isn’t.
“If you think of all the big players they’ve either shut down to new business entirely or if they are in the market they aren’t doing anything with profits.
“If you look at the UK in total there are quite a few with-profits funds that are open.
“If you look at market place by types of profit almost nobody is selling with-profits regular savings. With-profits sales as a per cent - profit sales as are a fraction of the new business - in the past they would have been the whole market.
“There are very few big players out there actively banging the drum for with-profits. To say it is a sideshow is giving it to much credence.”
Alan Lakey, senior partner at Highclere Financial, said with-profits used to be the automatic choice but times have changed.
He said: “With-profits used to be the automatic choice when I started in the industry. With-profits was the respectable way forwards.
“The problem is with the regulatory scrutiny it’s very difficult to show that they are transparent - they are not transparent but they do serve a function. The most respected office without a doubt is the Prudential.
“With-profits [has been used as] a method of smoothing out fluctuations in the market probably since the FSA started.”
He added that previously 80 per cent of endowment plans that he used to arrange were with-profits but today very few people invest in the fund.
“Their time appears to have gone. It will be interesting to see what happens to closed funds.”
ruth.gillbe@ft.com
