sales development actuary chris hancorn praises fsa for trying to improve consumer understanding of the product
Standard Life has defended the role of with-profits as a mass market investment vehicle but said the industry needs to act to increase transparency.
Chris Hancorn, sales development actuary for Standard Life, noted the concept of with-profits is not only favoured by the life industry. He cited FSA chairman Howard Davies and the Consumers Association backing the vehicle for its smoothing of returns and ability to outperform deposit rates.
With 11 million investors and more than £320bn under management, with-profits products are the natural savings vehicle for the UK consumer, according to Hancorn.
Even Sandler has said with-profits should be one of the core suite of stakeholder products he is proposing, Hancorn pointed out.
Speaking at Investment Week's recent with-profits conference, Hancorn praised the regulator for the changes it is instigating in the product.
He highlighted the FSA's review, centred on trying to improve consumer understanding of, and confidence in, with-profits.
Hancorn said: 'There is poor consumer understanding. They see with-profits as opaque with a lack of information for consumers and advisers.
'At the same time, there is poor consumer confidence. Trust has been dented by a series of shortcomings, such as Equitable Life, mis-selling and the Consumers Association's view of reattribution of inherited estates.'
The thrust of Sandler's review was also noted for bringing up the issues of transparency, conflicts between shareholders and policy holders, and the fact competition focuses on historic payouts and financial strength, rather than investment returns and cost efficiency.
Hancorn said: 'The minimum requirements coming out from Sandler and the FSA are to improve transparency for existing and future customers and the need to identify the fundamentals and let competition be driven by them.'
Standard Life's belief is that the client sees a with-profits policy as involving regular premium payments, removal of changes, regular bonuses and a final bonus added as well as a payout at the end. In practice, Hancorn said, a client pays a premium and the assets available to him at maturity are down to investment returns, or lack of them, smoothing, profit and expenses. 'The assets available drive the payout,' he underlined.
Hancorn went on to question whether guarantees on with-profits are actually fundamental to clients. He said they might be for some clients but it needed to be explained to them that there is a cost involved in providing such a benefit.
With-profits provide something no other fund or asset mix can match, according to Standard Life. A 100% exposure to fixed interest is too conservative, 100% exposure to equities is too volatile, and while a mix is preferable, it is not as good as with-profits, Hancorn believes.
He said a well-run with-profits fund allows for the optimal blend between asset classes but, because of smoothing, can produce that with less risk to investors than could be provided from a fund. Turning to the future he admitted life offices may need to rebuild reserves after several years of falling markets.
He added: 'However, the lower guarantees being put on new business need less capital.'
Other criticisms of with-profits include the fact equities may not perform well and future bonuses may be low.
Hancorn said: 'It was ever thus. However, Standard Life with-profits customers can expect a fair, smooth return, reflecting the experience of their investment.'
'Life catches up with us in the end'
‘Personalised Predictive Analysis’ tool
Summer series continues
Both start in August