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Clients in a ‘closed’ with-profits fund

This article is part of
Guide to With-Profits

Most with-profits funds are now either formally closed or are writing much less new business than in the past. Very few continue to increase their funds under management.

A formally closed fund is required to operate to a formal run-off plan, designed to ensure that the fund is paid out over time to its policyholders - plus any shareholders’ share of profits - in a fair way.

The FCA has to be sent a run-off plan when a with-profit fund closes and the regulator can also ask a provider to send its current plans at any time. An open but shrinking fund will also have a plan to ensure that future payouts to different generations of policyholders remain fair.

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Even a formally closed with-profits fund can continue to receive additional contributions to existing policies and even admit new members to existing pension schemes. Providers may not be able to continue to support this for all of their many different types of with-profits policy.

Unit-linked policyholders may also still be able to switch into the with-profits fund.

So a client being in a closed fund is not necessarily a cause for concern, says Mike Kipling, with-profits actuary at Friends Life. Indeed, he says being in a strong fund which is running off can have advantages, as the run-off plan may require it to distribute its ‘inherited estate’ to maturing policies.

He says key areas for advisers to look out for when reviewing their clients’ with-profits investments are the proportion of the underlying asset invested in shares and the target proportion of ‘asset share’ used when setting bonus rates.

Mr Kipling says: “A high equity backing and a target of well over 100 per cent of asset share are signs of a strong fund with an inherited estate to distribute - although a high equity backing can also lead to larger falls in expected payouts when markets deteriorate.

“If a closed fund does not have these advantages, particularly if it has a low proportion of equities, it is worth considering whether a client should surrender their policy and invest elsewhere.”

For clients whose with-profits investments have passed their original objective, for example late retirement, bonds older than 10 years, it is worth checking with the issuing provider whether any material guarantees remain or might expire shortly and whether the product continues to accrue further bonus entitlement.

If the answer is not positive, Mr Kipling says an alternative investment may well be appropriate.

He notes policies with generous guarantees and, in particular, guaranteed annuity rate options, should only be surrendered after proper consideration of their value.

Paul Turnbull, actuarial and capital director at Aviva, says when reviewing guaranteed annuities, advisers should check for key dates, such as future surrender value or inflation-protected guarantee dates.

If there are guarantees, Mr Turnbull says it is important to check the policy terms and conditions so you understand when they would apply, whether a ‘market value reduction’ could be applied at any point, and options during the client’s guarantee ‘window’.