Critics have always accused with-profits of smoke and mirrors and after last week's announcement by ...
Critics have always accused with-profits of smoke and mirrors and after last week's announcement by the Equitable, most of its policyholders would not disagree.
With-profits has been described as non-transparent but through lots of complicated actuarial calculations investors in a fund get smoothed returns. In good years they forfeit some gains to compensate for poor or negative returns in not so good years. Equitable's announcement that it was cutting 16% off policyholders' pots in its with-profits fund due to stock market fluctuations is therefore all the more surprising.
With-profit funds have always been considered low risk investments, so unless Equitable's was loaded with tech stocks it's hard to imagine how a fund with a conservative investment mandate could have fallen so far.
The UK Equity Income sector is down 2% for the year to 4 July but is up 5% over the past three months and even funds in the All Companies sector have only fallen by an average of 11% for the year to 4 July. And these are funds that don't have the advantage of being able to smooth the returns of a bad year, or invest heavily in bonds, property and cash.
Despite the mutual putting in an MVA, which at one point rose as high as 15%, it looks as if policyholders must have made a significant rush for the exits, leaving the group in its current position.
While other life offices may have also applied MVAs due to market volatility as a form of protection on their fund, so far no other group has announced the sweeping cuts that Equitable has, and it is unlikely given the response Equitable has received, that any will now.
The big issue for advisers who have clients with Equitable is simple: is there more bad news to come or is the 16% hit and the promise of a 7.5% MVA as bad as it's going to get?
The danger for the life industry is the negative feeling of policyholders towards Equitable could very easily colour their view of with-profits full stop.
Despite previous announcements that the FSA was reviewing with-profits products and the controversy over them in the stakeholder debate and now the son of Myners review getting underway, little has dented investor enthusiasm for the 'safer' product. The question this week is now not whether Equitable will recover from this latest blow, but will with-profits.
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