with-profits annuity research by chartwell shows lack of transparency by product providers
A survey of some of the largest with-profits providers has found Axa to be in the soundest financial health when judged by its free asset ratio, followed by Liverpool Victoria and Legal & General.
The research, carried out by Chartwell, found Axa had a free asset ratio of 26%, followed by Liverpool Victoria on 22.3% and Legal & General with 21.2% while Scottish Mutual came bottom of the nine life offices surveyed with a free asset ratio of only 4.2%.
The performance of each company's managed funds was also listed with annual compound growth rates (ACGR) over five and 10 years being measured.
Norwich Union was the best performer over both five and 10 years with a five year ACGR of 4.4% and 8.1% ACGR over 10 years. Axa was second best over both five and 10 years with an ACGR of 3.7% and 7.2%.
Britannic performed the worst over five years with 2.4% ACGR and Scottish Widows was worst over 10 years with an ACGR of 6.2%.
The financial listings form part of a survey on the costs and transparency of the nine life offices' with-profits annuities. Administration and management charges applied to with-profits annuity policies, measured as reduction in yield (RIY), were also compared across the different insurers. Standard Life was the cheapest for policyholders with an RIY of nil while the most expensive was Liverpool Victoria with an RIY of 1.3%.
However, Chartwell takes the position there will inevitably be costs in arranging a with profits annuity.
These it calculates should typically be around 1.2% in total. Insurers which have costs less than 1% it suggests may not be accurately reflecting true costs.
According to Chartwell the Standard Life policy gives the impression there are no arrangement charges although the intermediary firm asserts this is not the case. To make this process transparent it believes Standard Life should be required to disclose the profits from other sources that are covering the costs of its with-profits policy.
Britannic is highlighted by Chartwell as the only life assurer to be completely transparent in respect of all associated costs.
Another important area noted by Chartwell is the assumptions a life office makes in calculating mortality. Lack of transparency here means a company could hold back bonuses to cover any errors in its mortality assumptions. Britannic is the only company surveyed that do not reduce bonuses to cover additional costs due to errors in mortality assumptions.
Chartwell would like to see life insurers bear the cost of errors in mortality assumptions rather than the investors. Companies should also put less emphasis on mortality for with profits annuity clients, it believes, as in general they tend to live longer than conventional annuity investors.
An ideal with-profits fund, the report concludes would come with the strong financial backing and flexibility of a Prudential or Norwich Union allied with the transparency of the Britannic fund.
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