With ProfitsJan 17 2019

Insurance companies have found new ways to market with-profits

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Insurance companies have found new ways to market with-profits

With-profits funds used to be heavily marketed to consumers as a 'safer' way to invest in a range of assets, and to get positive returns with the prospect of a good bonus at the end of the term.

They operate in many ways that are similar to a balanced fund, in that they invest in a diverse range of assets, and they attempt to smooth out the worst effects of bad investment performance, by holding back some of the strong returns in good years, and allocating them to bad years.

They were immensely popular in the 1980s and 1990s, and attracted investors with promises of good bonuses. 

Most insurance companies offered them and competition became intense between them. As a result, they competed on bonuses, trying to attract investors with the prospect of amazing returns.

 Essentially, if I'm extracting money, I want as much stability in that pot but still want a return. How can you find that return but without volatility?Paul Fidell

To get these, the funds invested heavily in equities, but as the market turned following the dotcom crash, equities lost their lustre and the funds had to apply Market Value Reductions (MVR). This gave with-profits funds a bad name, and funds had to move into lower risk assets, such as bonds.

This turned people off even more, as the providers could no longer offer fantastic bonuses in the way they could in the past. This meant that less money came into the funds, which in turn meant less to play with.

Nonetheless, despite their lack of popularity compared to the past, they still offer something to investors.

Good for retirement

Many are suggesting they are good for retirement as a decumulation tool, with clients using drawdown products to access with-profits funds.

Paul Fidell, head of business development for investments at Prudential, says: "When pension freedoms came in, the comment at the time was, how was this going to impact on Pru because it might affect the annuity book?

"What people didn't appreciate is if you're not buying an annuity you still want an income, and one of the last things you want is you don't want too much volatility on that pot of money.

"Essentially, if I'm extracting money, I want as much stability in that pot but still want a return. How can you find that return but without volatility?"

He adds: "People started buying Pru Fund in drawdown, and we have a big share of the drawdown market."

Prudential has 31 per cent of the with-profits funds market, according to actuary AKG's with-profits market briefing. It currently has £103bn invested in with-profits funds, and £45bn of assets in the Pru Fund.

Many of the friendly societies, or mutual insurers, keep the with-profits sector going, and offer a range of ways to access them.

NFU Mutual can offer a with-profits pension, Isa, and insurance bond.

Sean McCann, a chartered financial planner at the mutual, says the asset allocation is 17.5 per cent in property, 57.5 per cent in shares, of which 41 per cent is in UK equities and 16.5 per cent in overseas equities; 21 per cent is in bonds and 4 per cent is in cash.

He says: "In terms of the way it works, with the pensions, there's a guarantee we offer. We're investing the money and paying a bonus each year depending on the success of the fund, but we keep some back in the good times to put some in during the bad times.

"As with most with-profits funds we do have an MVR. Investors will put money into the fund to buy units which will go up and down, and if people pull money out we will apply an MVR.

"With pensions, we won't apply an MVR in a selected retirement date."

For the other products - the Isa and investment bond - the kind of people they would appeal to are those happy to invest for the medium to long-term, looking to outperform deposits but who like the smoothing process.

Keeping it friendly

Performance for the fund over the past five years is as follows: in 2018 it lost 3.3 per cent; in 2017 it gained 10.2 per cent; in 2016 it increased  by 18.1 per cent; in 2015 it made 5.7 per cent; and in 2014 it made 9.5 per cent.

Royal London offers with-profits funds and allocates profits from other parts of the business to the fund as part of its bonus.

This means that £1,000 invested in a typical unit-linked policy that grows at 5 per cent compound each year, is likely to return £1,629 at the end of 10 years.

The with-profits asset share returns £1,791 over the same period, representing a compound increase of 6 per cent.

Some of the smaller friendly societies offer access to with-profits funds via a tax-free savings plan.

Shepherds Friendly, for example, offers what it calls a Bonus Plan Fund, that allows tax-efficient savings to be put into a with-profits funds, to a maximum of £270 a year.

melanie.tringham@ft.com