With every day that passes a few more policyholders unwittingly lose the value of their 10th anniversary With Profits Bond guarantee as the date for them to exercise the option expires. Unlike most insurance companies, however, Aviva have allowed policyholders who pass their 10th anniversary guarantee date to carry forward the value of the guarantee.

We've been long concerned that by carrying-forward the No-MVR Guarantee policyholders might be lulled into thinking that they do not need to take any action. This would be an expensive mistake. We've argued that Aviva must do more to explain to policyholders that these no MVR Guarantees are extremely valuable but only if policyholders switch out or cash in.

After Professional Adviser joined in the campaign, Aviva have made some changes to the wording of their 10th anniversary letter and have agreed to improve the quality of their ad hoc statements.

Aviva are caught in the common position for insurance companies of managing a conflict of interest. On the one hand they know that if every policyholder understood this guarantee and cashed-in they would need to raid the Inherited Estate they acquired in last year's reattribution exercise by hundreds of millions of pounds. On the other hand, they are required by the Financial Services Authority to treat customers fairly and Aviva's head of investment marketing has stated that Aviva's "own advice is currently to switch out of with-profits (or surrender, if the money is needed) to benefit from the guarantee."

We call on the personal finance media to help policyholders urgently get to grips with their with-profits guarantees.

Readers wanting to know more about 10th anniversary guarantees can receive our free Aviva Aluminium Report.

Professional Adviser ran the following article on the front page of their February 18th 2010 edition.

The Aviva Aluminium Report is our 12 page report which explains the main issues that we believe With Profits Bond holders with Aviva (sold through CGU) should understand about their investment. While it focuses on Aviva, the concepts we explain will be of interest to any With Profits Bond holder.

The report includes;

• Why this With Profits Bond is like winning the lottery
• How you will lose if you don't claim on your winning lottery ticket
• What Aviva say about the 10th anniversary guarantee
• How the money is found to pay for these valuable guarantees
• What to consider if you don't have a guarantee

For your free copy of our Aviva Aluminium Report, please click here.

How did With Profits get into its troubled state? Was it a "rip-off" like some have suggested or was it more related to the changing economic environment? In a new blog article With-Profits' Malaise: The Cause and Effect, our with-profits expert Miles Hendy looks at the past 50 years of with-profits and warns that the cause of with-profits' malaise are valuable guarantees that are at risk of being discarded.

Like that long awaited bus, not one but two blog articles appear today. In With Profits Bonds in Plain English, Miles takes a look at what might appear in a With Profits Bond sales aid if the companies were a little more truthful.

Aviva this week stated that they considered that future sales of With Profits Bonds are likely to come from direct marketing and other affinity partners rather than through Independent Financial Advisers. The article appeared on the front page of Professional Adviser and withprofitsheathcheck's with-profits expert Miles Hendy was quoted.

There are good reasons why so many Independent Financial Advisers no longer have confidence in With Profits Bonds and Aviva's comments generated a vociferous response from IFAs in the comments section on the ifaonline website.

The Professional Adviser article appears below under the heading "IFAs to Lose out to Banks on with-profits" .

 

Our main observation relating to Friends Provident’s with-profits bonus announcement today is that the “Equity Backed Ratio” (the proportion of the fund that invests in shares and property) barely rose during the year.

The financial strength of the fund was such that heading into 2009 the fund had already heavily reduced equity exposure. At the end of 2008, the fund had an Equity Backed Ratio of just 16%. This meant that unlike some of the stronger with-profits funds, it didn’t need to continually sell equities as markets plummeted in January and February 2009.

Increasing the exposure gradually so that it finished the year with an Equity Backed Ratio of 26% meant that they could enjoy some of the rally, but compared with a gross return of 17.17% for Friends Provident’s Cautious Managed Fund*, the 9.3% return before tax (about 8.3% in a bond and endowment) is hardly impressive.

We also feel that by comparing the returns in their With Profits Bond with the Halifax Liquid Gold account they have failed to make a realistic comparison. With-profits Bonds are long term investments while the Halifax Liquid Gold is an instant access savings account. At least Aviva compared their 10 year With Profits Bond performance in their annual statement with an average savings account with a return of 13.8% over 10 years. The Halifax Liquid Gold index grew by around 8% according to Friends Provident’s release. Hopefully most people will work out that a savings account with a total return as bad as 8% over 10 years was very hard to find and that the Friends Provident With Profits Bond return of 17.4% over 10 years to February 2010 is a poor return too.

Friends Provident continue to stick with their claim that bailing out of equities was a tactical decision (see page 3). If it was all about tactical decisions, they could surely have positioned the fund like they positioned their cautious managed fund and doubled the return? A quick look at the guaranteed bonus rates on Appendix 2 and the exceptionally low bonus rates of 0.1% on other classes of policy also indicate the company has made strong guarantees that weigh heavily on the liability side of the balance sheet. A with-profits fund with significant liabilities has to be sure that the assets can match them and this is why volatile assets like shares and property get sold. In the long term these volatile assets are likely to deliver the best return and so their absence ought to be of concern to long term savers with a moderate (or speculative) attitude to risk.

In summary, growth prospects remain sorely restricted for with-profits policyholders. The good news for some is that they clearly have very valuable guarantees but that also means that it’s bad news for others in the fund who don’t have such guarantees and who are destined for poor returns in the future. Friends Provident with-profits policyholders should get their policies assessed by an IFA with an expertise in with-profits to see which camp they are in.

At Fraser Heath we're passionate about helping policyholders really understand how their with-profits policy works. One of the key issues that influences this is language. Journalists and IFAs commenting in the press almost all refer to a Market Value Reduction (MVR) as a penalty. This is wrong. It's not a penalty and it matters that policyholders really understand this point.

We wanted to know whether any with-profits companies actually refer to MVRs as a penalty. We googled for articles where the words market value reduction and penalty all appeared in the same article. We found scores of newspaper articles wrongly referring to it as a penalty and the first relevant hit we found from an insurance company was the 94th article to appear where Standard Life stated:


Please take a moment to really understand that statement. It's critical. The MVR is NOT a penalty. If there's a guarantee to not apply an MVR, then that's a truly valuable guarantee.

My blog article on Market Value Reductions are NOT penalties explains this in more detail.

Standard Life issued their With Profits annual statement on 26th January 2010. Our broad observations are that most classes of business are backed by a reasonable mix of investment assets and that past performance seems reasonable too.

From an advice perspective, the key point that struck us here at Fraser Heath was the low exposure to equities for with-profits policyholders who have a guaranteed bonus rate. Some pension policyholders have a guaranteed bonus rate of 4% a year and this fairly modest commitment is clearly causing Standard Life some concern. The assets backing the guaranteed book are now invested 81.2% in fixed interest and cash, suggesting that Standard Life feel they cannot affiord to take risks. The growth prospects of this book is clearly limited and a policyholder should prepare themselves for a return likely to be no more than the 4% guaranteed return. This may of course entirely suit policyholders, especially cautious savers and those approaching retirement but more speculative savers with some time to go before retirement should seek out advice.

The second observation is that their With Profits Bond fund returned 8.6% over the year with the same asset mix as Aviva's with profits fund started and ended 2009, but which only returned 6%. Our observation here is that Standard Life's With Profits Bond has very low guarantees unlike Aviva's fund and as a consequence appears to have been able to avoid selling equities cheaply and buying them back more expensively like Aviva did. 

2009 was another problem year for Aviva with-profits funds. 2008 had been bad enough with the "is-it-on-is-it-off" reattribution affair. Criticism was thrown at Aviva from every angle as the funds available to distribute to policyholders who accepted the reattribution payment was cut drastically.
Article posted initially on our sister website: http://www.reattribution.com/with-profits-news/aviva-with-profits-another-annus-horribilis

Anxious to avoid further bad publicity they announced their revised reattribution offer with a stated minimum value for the Inherited Estate. In making sure the minimum wasn't breached, Aviva used derivatives to avoid this fate, an act which effectively saw the Inherited Estate miss out on one of the largest stock market rallies in history.
  
Their announcement on 12th January 2010 that the with-profits fund had performed so poorly was testament to the problems with-profits funds have with balancing the desire for stock market exposure with being able to meet policy guarantees. Other investment funds were gleefully buying the shares from with-profits funds who had effectively become forced sellers at low prices. Only when stock markets had recovered could they buy back the shares they had sold, at which point the shares were more expensive.

Policyholders will suffer in payouts in the future as a result. The Aviva with-profits fund returned just 6% in 2009 when Aviva's Distribution fund (an investment that might be suitable for a cautious to moderate investor much like a with-profits fund) returned 20%.

With-profits policyholders cannot recover this lost performance but they should note that a repeat of stock market falls leading to forced selling in the future should not be ruled out with the global economy far from out of the woods.

Added to the worry over further investment volatility is the startling fact that 57,000 policyholders have valuable guarantees that come in to play in 2010. We suspect this should be added to the large majority of the 33,000 policyholders who had such guarantees last year but waited for the reattribution payment and last Special Bonus before taking action. These valuable guarantees have to be met from somewhere. While in the first instance Aviva could call on the Inherited Estate that they have reattributed to shareholders, one could not entirely rule out the prospect of guarantee charges being applied to those who remain in an effort to recover lost funds.

2010 could be yet another annus horribilis and policyholders should review their with-profits policies carefully.

Fraser Heath has long been concerned about Aviva's stance of allowing the "No Market Value Reduction (MVR) Guarantee" on the 10th anniversary of some of their With Profits Bonds to carry-forward. We have spent much time finding ways of explaining why taking no action can unwittingly cost policyholders thousands of pounds. We think the second of our two videos explains this concept the best of all our attempts.
Article posted initially on our sister website http://www.reattribution.com/with-profits-news/aviva-admit-with-profits-bond-holders-should-take-action-on-10th-anniversary-guarantee

Following www.ifaonline.co.uk picking up on our press release in January, Aviva's head of investment marketing Richard Kelsall responded to my example of how a policyholder would benefit more from acting on this date than allowing the policy to carry-forward, by stating:
For those policyholders hitting their 10th anniversary today, the MVR is significant. The rates are 18% for those who took out a With Profits Bond in 2000 and 14% for those who passed their 10th anniversary in 1999. All such policyholders are urged to seek independent financial advice or to take advantage of our free with-profits review service.

We urge policyholders to understand that the long term investment return if they carry forward the No MVR Guarantee will be based on their asset share - the figure that would apply if the No MVR Guarantee didn't exist. We believe you should consider the No MVR Guarantee to be a Cashing-in Bonus (or Terminal Bonus).

While Aviva's reattribution process has, we believe, had a detrimental affect on the value of Aviva's Inherited Estate, there's no doubting that one aspect of their reattribution plan worked well. They successfully managed policyholder expectations about what payment to expect so that despite the value of the Inherited Estate falling over the period of the offer, policyholders were pleased with a higher than expected windfall.
Article posted initially on our sister website http://www.reattribution.com/with-profits-news/avivas-inherited-estate-hit-by-rising-markets

As so often with with-profits, the devil is in the detail. Stung by criticism for withdrawing the reattribution offer in 2008 when stock markets fell, the deal announced in January 2009 had a caveat that it would only proceed if the value of the Inherited Estate in the summer was higher than £1.2bn. Although at the time of the offer the Estate was valued at £1.5bn, they based the financial offer in their letters on the minimum fund value of £1.2bn.

This meant that even though the Inherited Estate was worth less in the summer than it was in January, it was higher than the minimum and therefore policyholders saw an increase in the payment from that stated in their letters.

If Aviva had not used derivatives as a method of ensuring the £1.2bn limit was not breached, it could have participated in the rise in value of the stock market. Instead, the fund chose not to participate and to accept a small loss when other funds were enjoying a strong rebound. By the time the reattribution offer had completed by the end of August, the FTSE 100 index of leading UK shares had risen 40% from its low point in early March but the Inherited Estate barely noticed it. We estimate that the Inherited Estate would have been worth 16% more if the fund had not used derivatives simply to ensure the deal proceeded.

We talk more about this in our Missing the Rally section of our website www.reattribution.com.