The use of the term "with profits" is misleading, the Treasury says, which is why it is seeking...
The use of the term "with profits" is misleading, the Treasury says, which is why it is seeking proposals for another term that would better explain to consumers exactly what a with profits product within a simplified suite would actually do.
Another issue involving with profits is the use of smoothing guarantees, which imply a lock-in – something that would work against the simplicity principle the government wants to apply to any of the new simplified products.
Instead of with profits with smoothing, it might be better simply to offer a "guaranteed" product that would guarantee a set amount of money back at any time in the future.
Market value adjusters are another problem, particularly with regard to Sandler's proposals for additional disclosure of fund asset values.
The Treasury says disclosure of such information may benefit sophisticated investors as it might encourage the use of arbitrage positions "to the detriment of other policyholders".
Another of Ron Sandler's proposals, the unitised product, would also need to be constrained and limit equity exposure to 60% in order to keep risk within acceptable levels, the Treasury's document says.
The 60% figure was reached after comparing the performance of funds in the IMA's "balanced managed", "cautious managed" and "defensive managed" sectors.
The defensive managed sector allows for a 35% maximum equities exposure, but the Treasury says its view is that this is too low to attract the number of product providers needed to open up a market in simplified products.
Therefore, 60% strikes the right balance between the need to minimise risks to consumers of funds underperforming against the need to attract providers into the new market.
"There will be further requirements for the product to be diversified across a range of companies, markets and sectors," the Treasury adds.
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