All declared surplus of with-profits funds should be put into the policyholders' funds, a separate s...
All declared surplus of with-profits funds should be put into the policyholders' funds, a separate smoothing account should be established, and funds could look at adding a guarantee, under the government's proposals for a range of simplified financial products.
The same three controls for Sandler's proposed investment products will be applied - simplicity, risk-control and charge controls - however additional four requirements are also being recommended, including the creation of a second type of with-profits modeled product carrying a guarantee rather than an Market Value Adjustment (MVA).
Those four proposals are:
With-profits policies - which could yet lose the 'with-profits label' according to the government - would not be allowed to set the charging structure for the entire life of the policy.
However, funds will still be given the flexibility to set an MVA to protect those policyholders who decide to stay with the fund long-term.
One of the key changes which should be implemented, said Sandler in his original document, is to give policyholders the redemption value of their policy each year in their annual statement and allow them to cash in their policy at that redemption value.
However, the Treasury is concerned that removing the ability to add an MVA could be abused by the more sophisticate policyholder, says the joint Treasury/DWP consultation document.
Transparency and the smoothing effect of with-profits policies leads the content to look much better value at some times than unsmoothed assets and lead to arbitrage by some policyholders.
Figures quoted by the Sandler products consultation say with-profits policies have seen less year-on-year volatility and unit trusts of between 7.3% and 16.3% while unit trust returns varied between 0.4% and 28.9%.
No definitive regulations have been proposed as to how smoothing should be conducted but the government has asked whether rules should be applied.
Balance of an smoothing should be zero in the long run, says the Treasury document, but initial proposals suggest smoothing performance could be calculated "to 50% of the difference between an expected growth rate (set by the provider) and the underlying fund performance", by looking at that difference and comparing it with the average growth of the fund since the policy was started.
Part of the problem with with-profits policies is there is the implication of a guarantee, says the Treasury, to suggest returns will be guaranteed if the policy is locked-in for a certain length of time.
The industry is being questioned as to whether the smoothing-effect would be effective if the government allowed companies to place return guarantees on a product as well as an MVA.
If it is not possible to work with smoothing, the MVA and a guarantee in one product, the government says it may consider the creation of a "simple guaranteed product" - either money-back guarantee or time-linked guaranteed return - as a lower impact alternative to direct equity exposure.
Risk controls will be the same as those set on simplified investment product - see previous IFAonline story for more information - even though there is a smoothing facility on with-profits funds, because the smoothing does not necessarily limit the exposure if funds are invested in more volatile equities.
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