While most of Aegon's with-profits funds are now closed to new business, the portfolio still holds £9bn in assets. Kira Nickerson reports on their performance
Attrition in Aegon's with-profits investment bonds has seen business in this area shrink to some £500m, although it still has some £9bn in offshore and onshore pension funds as well as other products that link to its with-profits portfolio.
Actuary Dave Metcalf, head of valuation and product services at Aegon, says there is a whole range of closed with-profits funds at the group, all of which feed into one main pot. The asset allocation of each of these funds, or products, is determined by the guarantees attached, meaning the equity to bond holding varies significantly between each. Metcalf points out that, for instance, there are some eight with-profit pension funds attached to this £9bn pot.
Among the group's largest closed with-profits funds/products are the £358m With-Profits fund (WP1), which has a 76.8% weighting to bonds and 20% in equities with the remainder in cash; High Equity (WP2), which has £2.3bn in assets and an equity position of 53.8%; the £1.9bn With-Profits Endowment fund (WPE) which has 18.2% in UK and overseas stocks; and Traditional With-Profits (TWP), which is £865m in size and has 14.8% in the UK equity market and 3.4% overseas with the remainder in cash and bonds.
All fixed interest positions in the with-profits are investment grade corporate bonds with ratings between A and AAA, Metcalf notes. In addition, none of the funds feature any property exposure - unusual when compared to other life companies and their substantial property weightings in with-profits. Metcalf points out that as most of the with-profits business at the group is closed to new investments, it is in effect in run-off and is therefore inappropriate to be invested in such a long-term asset class as property.
With various asset allocations it is unsurprising to see the variance in returns between the three funds with low equity positions and the fund with the higher allocation. WP1 has returned 3.3% over the 12 months to 30 June and 7% per annum over three years to the same end date. WPE returns over the same time frame equate to 2.5% and 6.4% pa while TWP gained 3.5% and 7.5% pa respectively. At the same time the fund with the largest equity weighting, the £2.3bn High Equity fund, gained 9.2% over the past year and 11% pa over three.
The pension High Equity fund has the highest equity weighting in the range due not only to the fact the fund was originally marketed in the 1990s as having a high equity holding, but also because it does not feature a growth guarantee as some of the other funds do. "The fixed interest weighting in the funds is closely correlated to the guarantees. High Equity still has the highest proportion at 55%, which is lower than when it was initially sold," Metcalf notes.
Like most of its life office peers, Aegon too was a forced seller of equities at the bottom of the equity market, which did little to preserve returns or help the funds regain since the market began to recover in 2003. At the time of the market falls in 2000, Aegon's High Equity fund, which launched in 1996 and closed to new business in October 2002, featured an equity proportion between 80-90%, which was sold down during the bear market years. At the height of the problems experienced by the market and the with-profits funds in most life companies, the fund also enforced a sliding scale market value reduction (MVR) to protect investors. At its peak, depending on the month and year the policyholder joined the fund, the MVR on High Equity went as high as 31%. However, today there are now only three months in which an MVR applies and the High Equity portfolio is the only closed with-profits fund at the group in which an MVR still exists.
In 1996-1997 the reversionary bonus on the portfolio was 7% while today it sits at 1.25%. That said many of the other with-profits funds at Aegon feature annual bonus levels of 0%. Metcalf notes: "Reversionary bonuses do not directly represent the investment performance of the fund - they are an increase to the guaranteed minimum payout, like a floor in your payout."
To better assess the underlying investment performance of a with-profits fund Metcalf says investors need to compare the progression of encashment values over time to allow for the combined effects of implicit growth guarantees, reversionary bonus, final bonus and/or market value reductions.
Terminal bonuses on the fund have been increased over recent years and now sit as high as 56% uplift in some cases. Of course in other cases there remains a 0% terminal bonus, depending on when the policy was purchased. For policies enacted in the three months in which an MVR still applies, December 1999 (2% MVR), January 2000 (2%) and August 2000 (3%), there is 0% uplift available. Still, in the main policyholders are getting a final bonus. Those with policies in 1999 are receiving between 2-10%, except in December, while policies take out in 1998 range between 4-21% and 2001 polices go from 4% for policies in January through to 29% uplift for those enacted in September of that year.
While High Equity and the other pension and life bond with-profits funds at the group are closed to new business, this does not mean the company has exited this area of life business entirely. Aegon is one of the few life offices that launched several new products when it closed its main with-profits funds, using a more transparent construction and steering away from guarantees and bonuses. The so-called 'new style' with-profits funds were launched in September 2002 and consist of the With-Profit Growth and With-Profit Cautious portfolios. Referred to more as smoothed managed funds than with-profits, the growth portfolio features an equity-bond split of 85-15%, while cautious is a 60-40% divide. The two portfolios are still relatively small, under £250m each, especially when compared to the giant with-profits funds they are meant to compete against. As of 30 March, the Growth pension fund had returned 9% over a 12-month period and 10.5% pa over three years, while the Cautious version gained 6.2% and 7.2% pa respectively.
Mark Pearson, head of investment marketing at Aegon Scottish Equitable, explains the smoothing on the new funds is calculated daily and effectively means some of the return is held back in one year to compensate for potentially a rough time the next year.
Smoothing of the returns occurs by applying fund performance that is currently halfway between the actual returns of the underlying assets and the fund's disclosed 'expected growth rate', the group's view of the long-term rate at which the underlying assets will grow and is not guaranteed.
Pearson notes another key difference in the new style versus the closed with-profits funds is the higher costs associated with the guarantees in the old portfolios. "Even if the smooth funds and the with-profits had the exact same asset allocation, they wouldn't have the same return rate due to the charging difference," he adds n
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