Two events at the start of December underlined the diverging fortunes of the with-profits market. The first, Legal & General’s £650m sale of its “mature savings” business to Swiss Re, marked the end of the insurer’s 50-year association with the sector, and continued a trend of consolidation in a space that many investors have long deemed outmoded.
But the second event indicated that providers are starting to ask whether with-profits offerings, of sorts, can be made relevant to the modern pensions market. As savers’ flexibility increases, products that aim to combine smoothed returns with an up-to-date investment strategy are returning to the fore. Hence the launch of Aviva’s Smooth Managed fund on 11 December.
Until recently, the outlook for the sector was bleak. The products fell out of favour more than 15 years ago, hit by the Equitable Life scandal and cuts to payments after the dotcom crash.
More recently, attitudes have thawed. Chancellor Philip Hammond’s March 2017 decision to reduce the dividend allowance from £5,000 to £2,000 may have helped mitigate the tax advantages of funds versus investment bonds, and the latter remain a valuable option for trust planning.
But it is clearly the 2015 pension freedoms that have proved the real catalyst for renewed with-profits interest. As advisers and self-directed investors search for suitable drawdown options, Prudential’s PruFund range – first made available back in 2004 – has started to take off.
New era
The PruFund offerings differ from traditional with-profits products. The traditional practice of adding bonuses to fund values either during or at the end of their lifespan has been replaced. So too have the market value reductions (MVR), whose seemingly arbitrary nature gave with-profits the bad name they have since struggled to shake off.
In their place are the insurer’s expected growth rates (EGR), which are revised quarterly instead of biannually. Prudential describes these as “the annualised growth rates your investment would normally grow at. The EGRs reflect our view of how we think each PruFund fund will perform over the long term [up to 15 years]”.
Interest in the product is accelerating to the extent that it is now meaningfully bolstering the insurer’s bottom line. PruFund grew by 32 per cent during the first nine months of this year, taking total assets to £32.6bn. Table 2 shows how Prudential stands out among other providers in terms of with-profits bond sales.
Paul Fidell, investment business development manager at Prudential, says: “It’s been gathering momentum for quite a few years and there have been a number of trigger points that have kicked it on to the next level.”
