With-Profits Worth Touching?; It's the Bond That's Left Many Investors Shaken; and Has Stirred Up a Lot of Debate in the Financial World
Byline: JEREMY GATES
A FEW weeks ago, Standard Life, pride of Edinburgh and one of Europe's largest mutual assurers, wrote to tell me the fate of my pounds 5,000 with-profits bond purchased in autumn, 2000.
The bond is now worth pounds 5,518, said Standard Life - providing I die. If I live and want my money back, the value is only pounds 3,979 and 40 pence!
Despite last year's surging stock market rally, and the prospect of further excitement in 2004, I have managed to lose nearly a quarter of my money. And this in a with-profits bond, the trusty first choice of cautious savers who hate to risk money on the stock market.
Many other savers, of course, are in the same boat. Poor performance by with-profits funds from the big life insurers is sinking private pensions, endowment mortgages as well as simple savings plans for a five-to-10-year stretch like mine.
The main reason is that much of the money in ''with-profits'' went into shares chosen by expert managers - with the rest in fixed interest securities, property and cash to reduce risk.
The Standard Life kitty, for instance, which is attracting such close interest from the financial watchdog the Financial Services Authority (FSA), is 59 per cent invested in shares, just over 18 per cent in fixed interest securities like bonds and gilts, 15 per cent in property and seven per cent in cash.
The pain of my current loss will hardly be assuaged by a windfall from the demutualisation of Standard Life which could take two or three years to happen. If current predictions are to be believed, my windfall would be little more than pounds 500, barely half the current loss.
It isn't only falling share prices which sent the with-profits gravy train crashing off the rails.
According to Clive Scott-Hopkins at financial advisers Towry Law, the giant insurers paid out too much on maturing policies during the 1990s, when stock markets roared ahead and nobody could see the sudden reversal which lay ahead.
"With-profits endowments have produced superior returns to equivalent managed funds like unit trusts over the last 10-15 years,'' he says. ''This defiance of market trends cannot continue.''
Even in the last three years, problems have worsened - because life offices continued to pay out more than they can prudently afford on maturing policies.
And something seems to have gone terribly wrong, too, with the process of ''smoothing'', always reckoned to make with-profits such a safe and secure bet: big profits in good years are retained to boost payouts in a bad year.
This week, Scottish Widows announced that payouts on some endowment policies would be up to 18 per cent less than a year ago. The maturity date of a policy makes a difference of thousands of pounds to savers who believed they were taking the safe, boring option.
Is it worth touching a with-profits policy today?
Many savers already locked in have little choice. More than 21 million with-profits policies continue to attract about pounds 9.2 billion annually in regular contributions.
A policy like mine with Standard Life has an early redemption penalty for the first five years - and then an MVA, or Market Value Adjustment, which can be as high as 25 per cent of policy value. …