Investments  

MM Survey: Renewed signs of life for with-profit bonds

  • Gain an understanding of the current with-profits landscape
  • Be able to describe the performance of with-profits funds
  • Grasp how providers navigate with-profits in the current economic climate
CPD
Approx.30min

Healthy investment performance over recent years has also helped. Roland Horton, senior actuary at LV, says: “With-profits bond sales have gone from strength-to-strength, with ABI statistics showing a 10 per cent compound annual growth rate over recent years. Coupled with pension freedoms, this has driven consumer appetite for stable, secure investments.”

Prudential’s PruFund, which it describes as a “more transparent” version of a with-profits product because it does not reassess values on a quarterly rather than annual basis, is a notable success story in terms of inflows. The fund has taken in £2bn in both 2015 and 2016. Annual premium equivalent sales rose by 65 per cent in the first nine months of 2016, according to the firm.

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The key numbers

As with any other investment, the performance of with-profits bonds should be judged over a number of years. A long-term time horizon is particularly important for these products because of the existence of creation charges and early exit penalties. The individual performance of every bond surveyed, collated in Table 3, outlines this – many of the 12-month cash-in values are below the bonds’ current values as a result of these fees. Most of these fees have been fully erased after five years of holding or longer.

Another idiosyncratic element of with-profits bonds is the possibility of a terminal or final bonus upon maturity. Again, providers maintain discretion to adjust these to reflect market conditions. Table A shows the current terminal bonus rates applied by those providers surveyed. Results have been positive over the past 12 months, almost universally, with Foresters, Phoenix Life and Royal London all increasing rates from this time last year.

It is important to note that the rate is very much dependent on the date of investment, so in many cases, individual investors would have experienced a lower terminal bonus. But this generally healthy environment for terminal bonuses has not been reflected in an improvement in 10-year cash-in values. Instead, the average cash-in value for bonds held over this period has fallen to its lowest level since 2011, as Table 4 shows. An average annual growth rate of 4.4 per cent looks relatively meagre compared with the returns of recent years.

One factor behind this shift may be have been caution on the part of providers when deciding annual bonuses. The last year has provided an unusual mix of poor sentiment but healthy returns, and this may have played on providers’ minds.

Although Scottish Mutual has incrementally increased annual bonuses on its Life Series III from 0 per cent to 4.5 per cent since 2011, it is out of line with the wider trend. Teachers Assurance, for example, has taken the opposite approach
on its Anniversary Bond, where bonuses have fallen from 2.1 to 1.3 per cent. The latter is in a good position to do so, as its 10-year annual growth rate of 7.6 per cent is by far the highest in the table.