Pru ploughs a lonely furrow on with-profits

Pru ploughs a lonely furrow on with-profits

The numbers sound impressive: a 20-year, £50-a-month endowment policy with Standard Life would be worth £22,724 now, up almost 14 per cent on last year; at Norwich Union, the final bonus on a 10-year, with-profits bond has risen from 21 to 25 per cent; and bonus announcements due from companies such as Prudential and Scottish Widows over the coming weeks are likely to feature similar figures.

But dig beneath the latest bonus announcements from these life assurers and the results look less impressive. The £34,183 payout on a 25-year endowment from Standard Life, based on an investment of £50 a month, is less than 40 per cent of the level reached in the glory years of the late Nineties; at Norwich Union, more than 90 per cent of its mortgage endowments are forecast to undershoot their target value.

To be fair, the peak payments were as over-inflated as the current ones are depressed. As Tom McPhail, pensions adviser at Hargreaves Lansdown, says, these with-profits funds are still suffering from the 'arms race in the late Nineties, when they indulged in reckless behaviour, spurred by the need to continue writing new business and the belief that the bull market would go on forever'. Nor were they the only ones seduced by stock market bull runs: some conventional fund managers, particularly in the technology sector, are still struggling to make up for their losses back then.

But with-profits funds have many more charges against.....continued below

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them than declining performance. Too much of the maturity payout depends on the final, or terminal, bonus payment, which is unpredictable and, as recent years have shown, liable to be cut sharply. They are among the most expensive investments you can buy - the financial adviser who recommends the policy (and too many are still doing that) can take the equivalent of more than the first year's premiums. They are inflexible: if you want to get your money out before the end of the term you signed up for, the penalties are likely to be significant, even if the company does not impose the 'market value adjustment' that cuts the amount you will get. They are opaque: even if you can understand the rather abstruse annual bonus statements, you have no way of judging what your terminal bonus will be.

Small wonder, then, that most of the big insurance companies have effectively stopped marketing with-profits. There are a few notable exceptions, including Prudential, one of the strongest performers around, which has worked hard to address the key drawbacks of with-profits, via products such as its PruFund. This product allows savers to track its value daily and only has surrender penalties in the early years. It has also performed well: anyone who invested £30,000 when it launched in November 2004 would have had a fund worth almost £40,000 three years later.

That performance has meant that the Pru is one of the few firms with a vibrant with-profits business: its PruFund has taken in £300m since launch and sales of its with-profits bond rose almost 60 per cent last year.

Standard Life has taken a different tack, embracing new-style products such as Sipps, the new flexible pension plans, which are generally cheaper and more transparent - an approach that owes much to Trevor Matthews, who has just resigned as head of its UK business to join Friends Provident, a departure that McPhail sees as bad news for the Scottish insurer.