Sales would increase with more understanding from intermediaries and greater transparency, says prudential
ntermediaries are missing an opportunity to sell more offshore with-profits policies because of a lack of understanding by investors, according to Prudential
Steve Johnson, investment director of Prudential UK Intermediaries believes once investors understand the concept of with-profits in the Far East, Middle East and Europe and what it can deliver against other investments, they will see the value of it.
With-profits policies have come under fire in the UK Sandler Review, where they were criticised for lacking transparency. According to Sandler, although policyholders can see what the overall return on their money has been, they do not know how these four components have contributed to it. They are unable to determine whether a good return has been as a result of superior investment performance, or whether, in fact, their underlying investment return has been poor and has been smoothed up using the fund's reserves.
Sandler has called for an increase in the transparency of these products, so investors have a clearer idea of how investment returns are made.
The gross return on a with-profits policy is composed of four different components: the underlying investment return; smoothing of this return either up or down; the contribution from participation in the provider's other business; and the charging of costs.
Johnson said: 'There are concerns around the smoothing process of these types of products. How does it protect clients from the volatilities and vagaries of the markets? And behind that, how does the fund management process work, to deliver the smoothing process?'
Bonus rates over the past year have been slashed. This has sparked concerns by investors over whether or not this type of investment is a good product.
According to Johnson, the myths surrounding with-profits and their returns will have to be dispelled.
He said: 'If you go back to the early part of the 1990s you had annual bonus rates, in some cases, approaching double digit returns. At the same time you had deposit rates at that sort of level. Although annual bonus rates have seen a downward trend since then, in 2003 you are typically seeing bonus rates at a level of about 3%, and deposit rates that are not too far away. So, has the world changed that much?'
One of the major concerns by investors putting money into this type of product is whether or not they have to subsidise existing customers.
Johnson points out while these fears can be real, generally they are not justified as the product providers put market value reductions on people who leave early, ensuring those who remain policyholders do not lose out.
'With the financially strong players new policyholders should not subsidise existing customers, nor should they be concerned,' said Johnson.
The with-profits market has also been bolstered by Traded Endowment Policy (TEP) market makers, especially as by the time the product reaches the secondary market, the initial premiums have been paid. Market maker Policy Plus International stated: 'The with profits concept has delivered good investment returns while providing the high security of strong guarantees. The smoothing effect also enables consistent returns.
'As with many investments, premiums in the early years are used principally to pay the expenses of setting up the policy. With a TEP all these charges have already been covered and so more of each future premium goes towards investment. '
The company noted that the guarantees given a policy are passed on to the new owner. It is common for the guaranteed sum assured and the reversionary bonuses to exceed the actual purchase price.
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