Strategic Finance

With profits market to be hit by exodus

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Strategic Finance
Written by Gary Howes   
Monday, 25 January 2010

 Skandia predicts up to £8 billion could soon exit with-profits bonds.

 

Hundreds of thousands of investors could take advantage of spot guarantees to exit with-profit bonds from 2010 and withdraw around £8 billion over the next three years, according to new research undertaken by Skandia.

Skandia reached this conclusion after analysing historic sales of with-profit bonds, which peaked to a total of 1.3 million policies between 2000 and 2002, representing £38.4 billion[1] of investment. Many of these bonds include a 10-year anniversary market value reduction (MVR)-free spot guarantee which enables investors to withdraw their money on the tenth anniversary of the bond’s start date without incurring the usual penalty which applies if a policyholder chooses to cash a policy in early.

Research conducted by Skandia in February 2009 revealed a weighted average MVR of 9% levied by six of the UK’s largest with-profits providers with aggregate with-profits fund realistic assets of £250 billion.

According to the analysis carried out by Skandia, which evaluated 287 with-profit bonds from 38 companies, of the 1.3 million with-profit bonds above, at least 30% representing 390,000 bonds or £11.5 billion are estimated to contain 10-year anniversary MVR-free spot guarantees.

Further Skandia research shows that 70% of investors believe MVRs to be the largest barrier to transferring out of with-profits products. Based on these figures as many as 273,000 bonds (£8.1 billion) or approximately one in five of the total bonds sold between 2000 and 2002 could be surrendered in the next three years.

Nick Poyntz-Wright, Chief Executive of Skandia UK, commented:

“In addition to enduring questionable investment performance, many with-profit investors have been trapped by MVRs, which are essentially a hidden and often substantial exit penalty. Over the next three years, which represent the ten-year anniversary of the boom time for with-profits sales, many bondholders will effectively have a ‘get out of jail free’ card and should carefully evaluate their position given the potentially serious consequences of missing out during this window.

For many people it is now time to re-examine with-profits to ensure past advice remains appropriate; something the FSA is expecting advisers to do in their regular client reviews and something that we wholeheartedly support.”
 

 
 
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