With profits fund returns plummet

With Profits has long been out of favour with many advisers when investing new money for clients. At the same time, there has been a significant amount of money moved out of With Profits into alternative funds to escape from the very low annual bonus returns in the pursuit of greater returns. Several life offices have launched ‘with profits fund analysis’ tools as an aid for advisers considering switching funds.

The tide seemed to have turned back in favour of with profits last year as terminal bonuses were increased; providers seemed to be sharing in the good times of recent years although reversionary bonuses still lagged well behind cash deposits. Recent news published in this article on the Money Marketing site (shown below) indicates that returns have, rather unsurprisingly, fallen in 2007. Norwich Union and Friends Provident have been the first to report this and others are likely to follow. However, both companies have increased terminal bonuses on long term bond business.

What are your thoughts on With Profits; stay or go? Do you use any of the With Profits analysis tools and what do you think?

Norwich Union and Friends Provident are the first in a predicted line of product providers to announce plummeting returns on their with-profits funds.

Returns on Norwich Union’s with-profits fund fell by more than 50 per cent last year compared with 2006 while Friends Provident saw a 38 per cent fall in the same period. However, both life offices have increased final bonuses this year.

For Norwich Union bonds taken out in 1995, final bonuses increase from 21 to 28 per cent year on year.

The life offices say that their with-profits funds have been hit by the sub-prime crisis and volatility in the stockmarket.

But they have come in for criticism from advisers who claim that investors are not benefiting from the upside of stockmarkets but suffering all the downside when markets underperform.

The Norwich Union CGNU and CULAC with-profits funds returned 5.4 per cent in 2007 compared with 11.9 per cent in 2006 and 17.7 per cent in 2005.

Friends Provident’s fund returned 5 per cent in 2007 against 8.1 per cent in 2006.

NU marketing director David Barral says: “Stockmarkets have been volatile and UK commercial property has had a difficult time. Despite this backdrop, with-profits has delivered by smoothing returns throughout this period.”

Informed Choice joint managing director Martin Bamford says: “The way that with-profits funds seem to be invested means that policyholders do not get the benefits of the stockmarket when it is performing well but suffer the downside.

“The returns on these funds are supposed to be smoothed and protected. These figures may serve as a wake-up call to with-profits investors who may have to make tough decisions about what they do with their money.”

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