equity holdings in pearl with-profits policies could fall further from current level of 35%
Advisory groups believe the turmoil at AMP caused by damaged solvency levels at its UK life subsidiary Pearl should not cause immediate worries for holders of Pearl with-profits policies.
AMP has admitted, however, that the asset allocation of the fund could change, with an already reduced exposure to equities falling from its current level of 35%. This means any recovery in the stock market would have a much reduced impact on investment returns compared to other with-profits funds still writing new business.
The life office's troubles, just the latest in an industry struggling to retain investor confidence and solvency levels after two and a half years of falling markets, have caused AMP's share price to collapse on the Australian market. It has also resulted in the resignations of AMP chief executive Paul Batchelor and chairman Stan Wallis.
The solvency issues that have spooked the Australian market, on which AMP shares were temporarily suspended, have caused far less concern to UK advisers, although there are significant risks.
Tom McPhail, pensions research manager at Hargreaves Lansdown, said while there is no cause for immediate concern for investors he would be concerned if Pearl's parent group AMP were to decide to stop backing the company.
'While it is true the FSA forced it to make a capital injection, which means technically speaking it was at one point insolvent, there is no cause for worry over the health of the company,' he said.
'However, I am wary of insurance companies that have large parent groups. What sometimes happens is that the parent company says the subsidiary is not making enough money and its duty is to its shareholders.'
The AMP group is perfectly sound, he added, but Pearl is not strong enough on its own.
Patrick Connolly, director at Chartwell, said: 'We are not at this point advising investors across the board to leave the Pearl fund.'
However, he pointed out, the Pearl with-profits bond does not apply MVAs after an investor has been with it for more than five years. 'A big problem is that there is a clause on the with-profits bond saying the company will never apply an MVA,' he said. It has left itself open with this.'
What the company needs, he continued, is for the market to bounce back before people start exiting the fund. The lack of an MVA may, however, prove only of short-term comfort to investors, Connolly added.
In the wake of falls in the FTSE 100, AMP will review its surrender values and, according to Connolly, the worst case scenario for investors is a terminal bonus of zero.
With no MVA, Pearl cannot eat into invested capital or reversionary bonuses. AMP will also review the asset mix of the Pearl with-profits fund, which stood at around 50% equities at the end of last year and now stands at 35%. This may fall further, the group admitted.
The third strategy is to review the supportable reversionary bonus rates. Lastly it is to include additional assets, which are admissible for regulatory purposes.
These steps are to cope with minimum regulatory capital requirements to FTSE levels of 3,000, the company said. Acting chief executive Andrew Mohl said the situation with the Pearl fund is entirely manageable.
'We are strongly capitalised and our contingency plan does not require the transfer of shareholder capital from Australia,' he added.
AMP said earlier this month it was making available '£500m to support the Pearl with-profits fund by 31 December 2002 on the understanding if the FTSE falls below 3,700, the adequacy of these resources will be reviewed.'
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