From march firms will have to tell investors how their with-profits funds are being invested
From March next year, firms offering with-profits funds will be required to provide policyholders with detailed explanations of the way in which the fund is managed and bonuses are declared.
The FSA last week included new rules into its Conduct of Sourcebook, requiring that all providers of with-profits formulate and make available the Principles and Practices of Fund Management (PPFM) applied in the running of their with-profits portfolios. The PPFM has to include information such as the manager of the fund, investment targets, style and approach plus how the smoothing on the fund is calculated, the fund's approach to early leavers and how the bonus declarations are determined.
Originally the FSA was to require this information be sent to all policyholders but the new rules now state that providers have to make it available to policyholders. Adherence to the PPFM, or the lack of it, must be reported on in the fund's annual report and accounts.
The FSA is also to require product providers to set up with-profits committees to represent policyholders' interests within the fund, effectively replacing the role of the independent actuary on the portfolio. From the end of March 2004, providers will have to set up a With-Profits Committee, consisting of external experts and non-executive directors of the firm. The split and the number of members required on the committee has yet to be announced.
The role of the independent actuary, whose other responsibilities and duties, such as deciding bonuses, are now to be moved to the board of directors of the firm itself, has also yet to be clarified. The board of the FSA has approved near-final rules and guidance relating to the future role of actuaries on with-profits and will announce them at a later date.
In a recent analysis of UK with-profits portfolios, Mercer Oliver Wyman found the quality of the underlying capital base of the life offices offering the funds has deteriorated significantly over the past year.
The use of soft forms of capital increased considerably, reflecting a growing willingness among the life sector to embrace a more active approach to their balance sheet management. Such soft capital represented 70% of free assets at year end 2002, up from 30% of free assets at year end 2001, according to the firm's analysis.
The sample analysed, comprising 28 of the leading UK with-profits offices, has a total of £24bn in free assets, of which £17m is comprised of softer forms of capital including implicit terms (future profits), contingent loans, subordinated debt and financial reinsurance.
In particular, contingent loans (hardly used during 2001) emerged as a popular financing tool in 2002, providing the industry with approximately £2.3bn of capital. Enhancement of the capital base was also driven by additional use of implicit items, generating £2bn of capital, subordinated debt, providing £1bn and financial re-insurance, providing £1.5bn.
Anthony Stevens, head of Mercer Oliver Wyman's insurance practice said: 'The deterioration in the quality of underlying capital reflects the industry's ability to manage more actively its capital base in response to pressure on solvency margins and the willingness of capital markets, and life offices' parents, to provide alternative forms of non-equity funding.'
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