Mike Kipling, with-profits actuary at Friends Life, says of course some funds have done very well and some very badly. Even within a single with-profits fund, some types of policies may be better relative performers than others.
He says the best, mainly quite small funds, have outshone all or almost all unit-linked products, often aided by the distribution of inherited estate. But others have underperformed significantly - and some had famously over-stretched themselves to the cost of clients.
Paul Turnbull, actuarial and capital director at Aviva, says many with-profits funds continue to be a stable investment, offering more steady returns than direct equity investment, but with the potential for better returns than cash over the long-term.
The best funds have also performed well against like-for-like alternatives such as managed funds, he adds.
But there are still funds that are set to deliver a shortfall against the investor’s expectations. Firms have been warning customers of impending shortfalls on mortgage endowments - not least because the regulator now demands they do so - for well over a decade.
If clients have not yet acted, Friends Life’s Mr Kipling says an adviser should determine the best estimate of the shortfall if the policy remains in force, making sure that this includes any amount which may be payable as final bonus, and advise the client to plan to fund the gap in other ways.
The adviser could then consider the relative merits of surrendering the policy today and paying down the mortgage (so fixing the size of the shortfall) or keeping it going (so leaving the gap variable).
Mr Kipling says the relative generosity of a fund’s surrender value basis is key here, and this can vary considerably between or even within funds.
Advisers who do decide to recommend ditching a with-profits policy should remember while alternatives are many and varied, none quite replicate the guarantees, mixed asset backing and smoothed returns of with-profits.
Managed fund products coupled with put options can emulate the guarantee of with-profits although Friends Life’s Mr Kipling warns the cost can be high.
‘Lifestyling’ can emulate the smoothing out of peaks and troughs of investment return for policies close to maturity or a target retirement age, although Mr Kipling warns this comes at the cost of some loss in expected growth.
