Why 'with-profits' means without profits

published 23 January 2009

Few investors can be regretting the day they entrusted their capital to a fund manager more than those lured into with-profits savings plans. These have been marketed, typically by large insurers, as suitable for risk-averse investors because they 'smooth' returns. In return for a regular monthly premium, an investor's cash is managed so that profits from investing in equities, bonds or property in good years are retained to boost returns in poor years. This minimises volatility and boosts the final maturity value of the plan. What's more, providers dangle the carrot of a 'terminal bonus' at the end of the fund's life to those who remain loyally invested. It's a great concept. Shame it doesn't seem to work. As Jennifer Hill in The Sunday Times reports, overall "70% of with-profits pension providers have failed to achieve the average annual growth rate of 7.5% over 20 years", a period during which the FTSE All-Share has returned an average annual 17.2%.

And now with-profits investors are being hit from three sides. First, investment returns are dropping. As Mark Atherton notes in The Times, total policy payouts for Norwich Union's 2.3 million customers are around 15% lower this month than a year ago. Next, terminal bonuses are being slashed. Friends Provident has cut the final bonus on 25-year endowment plans from 17.5% to 5%, while some of those holding with-profits pension funds will receive no bonus. As a result, says Danny Cox of Hargreaves Lansdown, many savers "are getting a lot less than if you simply put your money in a cash deposit account". Exit fees, or market value reductions (MVR), add insult to injury, rising by an average 1% this year, with Friends Provident levying 15% on 'disloyal' savers.

Yet 100,000 investors put £3.4bn into these plans last year, says The Daily Telegraph. It's down to one thing, says Andrew Fisher of Towry Law: commissions. "If they didn't bribe advisers with such generous commission rates (up to 7%), you would wonder whether anywhere near as many would be sold." Those stuck in poorly-performing plans should check the conditions, but don't rule out taking the MVR hit to get out in some cases, this will beat throwing good money after bad. As for everyone else, take Fisher's advice. Faced with over-complexity, arbitrary charges, and poor performance, he "can't see any reason at all today why someone would buy a with-profits bond".