Showing posts with label with-profits. Show all posts
Showing posts with label with-profits. Show all posts

Tuesday, September 22, 2009

Up with bonds, down with equities, out with with-profits

After the stockmarket ructions, pension funds are getting more cagey and thinking about weighting more towards bonds (htp: Pension Pulse). (A seminar I went to maybe 10 years ago predicted this trend.) Bill Gross of Pimco is also thinking that way; at the same moment when others reckon the recession's over, or nearly so.

My concern is that the market is now so volatile that only active traders will be interested. The smoothing approach of British with-profits funds has been undermined by downswings so sharp that more than once recently, they have had to apply penalties to investors seeking to exit early; which in turn will make those investors less inclined to reinvest in with-profits, and indeed quite possibly put them off investment generally.

That, plus the need to take more income as the population ages, plus a poorer next generation that will work longer, be taxed more and have less in State and other pension provision, plus the burgeoning of the world population, the gradual equalization of world average income (and it's a very low average), plus increasing ecological limits to fast-buck-type growth, all tend to make me more a bear than a bull for as far as I can see, whatever may happen in the short term as a result of desperate overstimulation with fiat cash.

Yes, there'll be opportunities for the agile financial player; but for the mom-and-pop saver?

Thursday, January 15, 2009

In-Equitable treatment

Victims of Equitable Life are to be paid off by the taxpayer, says the FT.

Equitable Life ran a with-profits fund, a form of collective investment that only goes up (as long as you maintain it to the end of the agreed term). Once awarded, bonuses on with-profits funds cannot be taken away. EL's undoing was that, like some other companies, they dragged in extra pension business a long time ago on the selling point of guaranteeing (in their case) a 12% annuity rate when the plans matured. That is, for every £100 in the fund, the life time income would be £12 per year.

When we moved from a high inflation/high interest environment to low/low, this promise became a ticking time bomb. When annuity rates generally have dropped to 6% or less, you need to double the fund to create the same income. So since there wasn't enough in the kitty, EL had either to renege on the guaranteed annuity rate (GAR), or take away much of the bonuses already awarded. I believe they tried both approaches and the courts wouldn't let them.

This GAR depth-charge was well known, or should have been known, to actuaries. The IFA network I was with in the 90s used to have a shortlist of approved companies (including non-commission payers) for each product, and at some point EL quietly dropped off the list. If outsiders could see the disaster looming, we have to assume the technical advisers on the inside knew even better what would happen. Yet EL carried on awarding bonuses to investors as though nothing was wrong.

Now, it seems compensation is to be paid because industry regulators failed to spot the coming crisis and step in. It's as though houseowners could sue the police for not stopping Bill the Burglar. Perhaps it helps EL investors' case that so many of them happen to be lawyers and journalists?

However, what is sauce for the goose is sauce for the gander. The same arguments can be applied to victims of the mortgage mis-selling of the past few years. For Equitable Life, read banks; for investors, read borrowers. And in both cases, it's the same regulator now.

Compensation, please.