With Profits  

With-profits funds: is there a future?

This article is part of
Guide to with-profits

With-profits funds: is there a future?

With-profits funds have fallen dramatically out of favour with the adviser community following the mortgage endowment mis-selling scandal of the 1990s.

Up until this time, with-profits funds had been used extensively to help people fund their mortgages, with the promise of paying off the mortgage and offering a lump sum at the end of it.

But a low interest rate environment and poor performance from equities meant that many would not meet the commitments people were expecting from them, and the FSA - as was - got involved and with-profits funds fell completely out of favour.

But many organisations do still offer with-profits funds, as a more basic savings vehicle or in the form of a pension, and according to industry analysis, they still offer useful returns.

Barnett Waddingham says that as at the end of 2017, the average performance of with-profits funds for one year was 6.22 per cent, and the five-year figure is 6.85 per cent, achieving a positive return over five years.

In its fifth investigation into with-profits funds, 'UK with-profits fund: investment performance and strategy', the actuary said: "We observed a range of investment returns achieved by the funds investigated over one year.

"In general, larger funds performed better than smaller funds. Despite this general trend, a number of smaller funds have performed well compared to the best performing larger funds."

Market players

According to the Association of British Insurers (ABI), the number of with profits policies held by ABI members fell from 5.2m in 2012 to 2.5m in 2017. According to actuary AKG, the biggest player in the market is Prudential, which reported £8.2bn of premiums in 2016, and a 31 per cent market share.

Standard Life Assurance, came in at £800m, with a 7 per cent market share and a number of mutuals have a strong presence with Royal London, Wesleyan Assurance Society and NFU Mutual making it into the Top 10.

Martin Shaw, chief executive of the Association of Financial Mutuals, says: "My mother had six with-profits policies and they paid nearly double the term. For an awful lot of people that's a really positive story.

"Where they weren't relying on the with-profits to pay off the mortgage people have had really positive results."

He added that, quite often, with-profits funds can outperform the typical unit-linked balanced managed fund, "but you also find a difference between mutual-owned organisations and Plcs because you're not paying money out to shareholders."

With-profits funds are essentially invested in an array of assets, typically equities, bonds, property and cash. As such they operate in a similar way to a multi-asset fund, but the difference is that they give a form of guarantee, promising a certain return at the end of the term, and they operate a process called 'smoothing', which is when returns are held back during a good year, to add to the pot during a bad year.