InvestmentsJan 3 2017

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
  • 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
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CPD
Approx.30min
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CPD
Approx.30min
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CPD
Approx.30min
MM Survey: Renewed signs of life for with-profit bonds

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.

On the whole, Teachers is not alone in trimming annual bonuses – otherwise known as reversionary bonus rates – which have been falling in the past few years with lower market rates of interest cited as one factor. However, the Bank of England’s recent rate cut will have little effect on reversionary bonus rates according to Martin Lawrence, fund manager and head of research at Wesleyan.

Mr Lawrence says: “The situation has moved on since the rate cut back in August 2016, and inflation expectations have subsequently risen, driven by rising oil prices and the depreciation of sterling against other major currencies.

“Ultimately, though, bonus decisions are derived from an actuarial process, which is based on factors such as underlying investment returns achieved and the outlook for investment markets.”

Penalties

An MVR is a penalty that can be applied to investors looking to surrender a bond in periods of severe underperformance. It is designed to protect those who wish to remain invested, as large outflows can heavily dilute the fund, and hurt those that remain invested. But this practice typically comes as a shock to customers.

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