With-profits providers will have to limit the use of market value adjustments (MVA) under the ABI's ...
With-profits providers will have to limit the use of market value adjustments (MVA) under the ABI's proposals to improve the image of the life and pensions industry.
In a report drafted for the ABI by consultants Tillinghast Towers Perrin, it is recommended that the MVA is only used to cover falls in the value of assets backing the fund and not to pay for initial expenses such as commission to intermediaries. The consultants suggested that any such costs should be identified as a separate exit charge.
The draft paper has been submitted to the ABI's Savings and Long Term Risk project team (SALTR) aimed at developing industry standards, such as product clarity, in order to regain consumer trust after scandals such as the pension mis-selling.
The MVA is generally described as a way to protect remaining investors in the fund, if someone redeems their units, and is not often applied. According to the consultants some groups, unnamed in the document, use the MVA as a means of adjusting for other costs.
Graeme Dumble, marketing manager at Scottish Equitable, one of the SALTR sponsors, said: "If this does occur then it is an outdated practice.
"MVAs are so opaque it could lead to a number of things but this is not best practice, which most companies follow.
"We sit in the demanding IFA sector and are, therefore, exposed to a high level of scrutiny. There are other parts of the market that may not have that same level of scrutiny."
The lack of consistency in the meaning and use of MVAs made it difficult for customers to properly compare products, the report stated.
Another discrepancy the consultants have identified in examining with-profits products is the use of enhancements or special offers such as increased allocation rates.
The report stated: "On occasion these special offers are not carried through to the asset share.
"The effect of this is that, although part of the policy which the policyholder sees, the nominal value of the units, is increased, the overall benefit is largely unchanged as the ultimate payout on those policies reflects the asset share to which no enhancement is applied."
The consultants suggested that unless a parallel enhancement is made to the asset share, special offers should be defined as unacceptable.
The draft paper was completed at the end of October and was seen by the SALTR committee at a meeting on 16 November. According to minutes of that meeting, the committee agreed to support the approach outlined in the draft document.
The committee regarded the issue of special offers as needing immediate resolution as unacceptable.
Mike Ross, chief executive of Scottish Widows and a member of the SALTR steering committee, refused to comment on any of the specifics of the with profits proposals.
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