Is this the end of With-Profits?

On Friday Legal & General, one of the UK largest insurance companies announced that they would be closing their with-profits fund (worth over £12 billion) to new investment. To be honest, I’m delighted.

With-profits funds sound quite good in principle – in essence they are an old-style way of investing, whereby the insurance company provided modest returns from the market, adding bonuses each year (which couldn’t be taken away once added) and then adding a final or terminal bonus at the end of the investment period. It was designed to provide a more predictable return for investors and a “smoother” investment journey. Unfortunately, you never really know where you are. You don’t get all of the market returns (and equally don’t suffer all of the market loss). However returns and bonuses have been falling over the years and the ability to actually have any meaningful indication of what an investment is actually worth is “difficult” with calculation made for market value adjustments and advanced payment of final bonuses. To be frank, the science of with-profit investing feels all rather like smoke and mirrors, though I don’t believe that this was the original intention.

Changes to market conditions and the requirement for with-profit funds to hold some very “low risk” assets has meant further depressing returns. I have never advised anyone to buy a with-profit fund, for little reason other than it is pretty difficult to figure out the real value of an investment. In a unit-linked type of investment, the value is the value – unless there are any penalties levied by old style charging structures. These days, in more “transparent” times, with-profits simply aren’t up to the task. Of course some of 0ur clients will have old policies that have with-profits so I have to give them consideration, but in an ideal world to my mind you should be able to see the real value of your investment each day. Here is an image I found, put together by Chase De Vere and in an item in the FT by Josephine Cumbo in March 2013… the article and graphic highlight the rise in declining final payouts from with-profit funds… and there are around 20m people with such holdings, which tended to be sold in the 1980’s and 1990’s.

Legal & General have confirmed that there will be no changes to their with-profit funds and it will be “actively managed”. The main reason for the closure is a reduction in business as a result of the adviser charging regime, the implication being that charges on funds have had to reduce and many advisers, have finally realised that they need to do rather more work than simply select a fund based on where they last had lunch…or saw “with-profits” as a default investment choice for the uninformed (on a massive scale if you are a Bank). I’m expecting other UK insurance companies to follow suit – at least those that are actively trying to keep up with the market.

Dominic Thomas