This article challenges eight commonly held assumptions about with-profits policies. It first appeared in Skandia's Informer Magazine in May 2010.

The Great Wall of China cannot be seen from the moon. Apparently it’s the equivalent to looking at a hair from two miles away. But the urban legend that it can be seen is so widely repeated that many readers may well be surprised to read that it’s not true.

Similarly there are assumptions relating to with-profits policies that are repeatedly stated as facts by journalists and media-connected IFAs that are either misleading or just plain wrong.

With-profits has a veneer of complexity that has lead to this widespread misunderstanding. I think the confusion relates to people mistakenly believing that the policy is worth what it states on paper. However every policy has two values, the most important being the true value of the savings plan known as the policy’s 'asset share'. This figure represents the actual investment return experienced on the money invested in the fund. The other value, the one that appears on the annual statement, is only worth this amount on a guarantee date if the asset share is equal to or less than the guaranteed value. If the asset share is worth more than the policy value a terminal bonus will be paid and if asset share is less then a Market Value Reduction will reduce the pay-out to asset share (unless it’s cashed-in on a guarantee date). Understanding the role of the asset share and challenging some firmly held assumptions is the key to understanding with-profits. 

Is a Market Value Reduction an Exit Penalty?

The MVR is simply a mechanism of giving the policyholder his asset share. It works on the basis that if you want your money back at any time other than a policy guarantee date, you should not expect to get back a figure that is more than your investment has made in the fund. Policyholders should not be led to believe that getting their asset share is somehow penalising them. They instead need to be encouraged to evaluate the guaranteed value and how this might represent a significant windfall.

Should you wait for a Market Value Reduction to be removed before cashing in?

If the guaranteed value is, for example, 5% higher than the asset share but the policyholder has to wait 10 years before they can actually get the guaranteed value, what is the opportunity cost of staying in the fund for a further 10 years compared to investing the money in an alternative strategy?

A 0% bonus rate a worse return than cash, right?

It might be the case the value already guaranteed on the guarantee date through bonuses already added is worth much more than you could hope to achieve if you reinvested your asset share elsewhere. If the policy already has a guaranteed value on maturity or on an MVR free date that is greater than the policyholder’s anticipated asset share, why should the insurance company increase the guaranteed value further by adding more bonuses?

Should investors exit their with-profits fund if the life office is financially weak?

The financial weakness of the company may be tolerable if the policyholder is enjoying a guarantee on their policy, the value of which made the company weak in the first place.

Should you always keep a policy with a Guaranteed Annuity Rate?

The Guaranteed Annuity Rate has to be applied against a fund value which may be significantly lower than the policyholder might otherwise expect if they transferred. This could happen through the company adding no bonuses and investing heavily in gilts and cash over a long period. It’s important to compare the guaranteed pension payable based on the guaranteed fund against a projected return in an alternative plan using a stochastic modelling tool and reach an informed view on the value of the guarantee.

Are with-profits funds managed to maximise returns?

Where guarantees have been generous historically investment returns can be compromised by the actuary moving money into cautious assets. This risk management process can lead to insurance companies selling equities at the bottom of the market and buying them back later at a more expensive price. The lost value of this process is implied by the low return of many with-profits funds in 2009 compared to the average cautious managed unit trust. If the policyholder has guarantees of negligible value but has investment prospects restricted due to this process, even cautious policyholders should consider alternatives.

Is a With Profits Bond MVR-free date a ‘Get out of Jail Free Card’?

The with-profits bond policyholder may be in a decent fund and may not feel ‘imprisoned’ by it. I prefer the analogy of the MVR-free date being like a lottery ticket worth potentially thousands of pounds which will be lost if you don’t claim on the ticket. Regardless of the quality of the fund and the policyholder’s fondness for the investment, any investor whose asset share is less than the guaranteed value can enjoy a windfall by cashing-in on this date.

Will insurance companies adequately explain guarantees to policyholders?

In May 2007 the FSA issued an Insurance Sector Briefing telling insurance companies to improve the way they communicated to policyholders on with-profits guarantees. Some of the ‘Examples of Less Good Features’ (sic) have been seen on statements issued in 2010. The value of MVR-free dates to policyholders often runs into thousands of pounds per policy and as this value can only be claimed by cashing in its understandable that insurance companies are not making it easy for policyholders to understand. We’ve written to the FSA asking them to issue a directive to insurance companies on how to communicate these guarantees more clearly. Meanwhile it requires clients and their advisers to be proactive in checking policy conditions.

Copyright Miles Hendy, Chartered Financial Planner, withprofitshealthcheck.com.

 

Communicating the Value.

The Financial Times have this week focussed in on the FSA’s findings that many insurance companies have failed to adequately inform customers of the value of Market Value Reduction (MVR) free dates and Guaranteed Annuity Rates (GAR) on their policies. As the FSA stated in their 2007 report on  with-profits, there is a conflict of interest for insurers who stand to lose out financially if policyholders fully understood and acted on their guarantees;


For many investors, the MVR Free Date on a With Profits Bond can run into thousands of pounds as the example below shows.

Did you invest in a With Profits Bond with an MVR Free Date?

As the FSA have established, insurance companies are failing to communicate valuable features such as MVR free dates to customers effectively. You need to check your policy document and be very specific in your questioning if you ring to ask if your policy has such a feature. We suggest you ring your insurer armed with the following questions:

“Does my policy have a date when I can withdraw the current fund value and a Market Value Reduction is guaranteed not to apply? What is the date and when do you need to be notified of my intention to divest?”

If the MVR free date has passed, “Do you allow for this MVR free date to be carried forward and remain effective now or is it too late?”

If they answer that the option has expired, please move on to the section below for further questions to ask. If the MVR Free date is still available to you ask:

“What is the current fund value of my policy?”

“What is the surrender value of my policy?”

“What is the value of the Market Value Reduction currently applying if I were to withdraw my money from the with-profits fund today?”

If you have passed the MVR Free Date and the insurance company is carrying forward the value of the MVR (such as Aviva [ex-CGU]), “What is the value of the carried forward MVR free amount that applied on the MVR Free date?”

“Are there any unit-linked funds that I can switch my money into without surrendering the policy?”

After asking these questions you should be able to ascertain the value of this MVR free feature for you. If the date has not yet passed you should consider your actions and be ready to act in good time. If you are at all unsure, please contact an Independent Financial Adviser with expertise in with-profits such as us at Fraser Heath Financial Management. But what if the date has passed?

What to do if your MVR Free Date has Passed

If the MVR free date has expired, you need to find out whether it had a value on the MVR free date by asking;

“What was the current fund value, surrender value and size of the Market Value Reduction on the MVR free date?”

“What is the current fund value, surrender value and size of the Market Value Reduction today?”

If you recognise from having asked these questions that you have lost out financially and you feel that you were not aware there was a financial gain to be made, ask: “I want to make a formal complaint because if I had understood that I could make this gain by divesting I would have acted. Please let me have the name, department and address for the person who deals with formal complaints.”

You then need to write in explaining that you did not understand the value to you of divesting and that you feel that the insurance company failed to adequately inform you about the feature. You should also point out that it has been the FSA’s report into insurance companies failing to communicate adequately that has brought this matter to your attention. Your letter should ask for your investment either to be switched into a unit linked fund or returned to you entirely at the value that would have applied on the MVR free date. Seek independent financial advice if you are unsure of what option (switching or cashing-in) is most suitable for you and be mindful of the Note about Surrendering below.

We anticipate that the insurance company will in the first instance reject your complaint and point to their letters that they have issued to you. In this event we believe that you should consider taking your complaint to the Financial Ombudsman’s Service citing the FSA report as being the catalyst for you understanding the feature and not the unclear letters from the insurance company.

Keep us Informed

We wish you good luck in your investigations. If you are affected by this we’d love to hear from you, whether you need our help, investment and tax planning advice or simply to share your experiences and frustrations.

A Note about Surrendering a With Profits Bond

Surrendering an investment bond can impact on income tax. If you are a higher rate tax payer (or may become a higher rate tax payer when the gain you have made on the policy divided by the number of years you have held it is added on to your taxable income), or if you enjoy the age related personal allowance for people aged over 65, you should also ask “What is the chargeable gain on the policy if I surrender the policy today”.

Alarm Bells and Little Comfort.

The FSA’s findings in their “With-Profits Regime Report” released on 30th June 2010 should ring loud alarm bells for with-profits policyholders, but their proposed actions offer little comfort for the hundreds of thousands of policyholders who stand to lose up to an estimated £1 billion from the inadequate communications of with-profits companies.

Insurers Fail to Communicate Valuable Guarantees Effectively

With an estimated 28 million policies worth £338 billion in with-profits funds at the end of 2008, savers might expect there existed a great deal of scrutiny and policing to make sure that the funds are well run. The police force for with-profits are the Financial Services Authority and in March 2010 they set out a Financial Risk Outlook 2010 with a section on with-profits that highlights just how big the problems are that they face in policing these funds.

A summary of the full list of activities that with-profits funds can carry out which might lead to poor outcomes for policyholders are at the foot of this news article.  The size of the list and the very fact that the regulator recognises that it has to try and keep a watch on all of these shenanigans should be enough to make any saver stop and ask whether their with-profits investment is really right for them.

For savers in With Profits Bonds approaching the 10th anniversary of making your investment, please pay particular attention to this concern of the FSA:


We know that many policyholders with guarantees on their policy (such as a guarantee to not apply a Market Value Reduction on the 10th anniversary) simply do not fully understand the benefit. In many cases these benefits have values worth thousands and even tens of thousands of pounds. The guarantees typically have a value on specific dates and if you don’t act on those dates you lose the value altogether.

If the FSA subsequently fines insurance companies for poor communication of these guarantees it will be scant consolation for those who missed out.

Our advice therefore is that you cannot rely on the cavalry coming. If you have a with-profits policy make sure you understand exactly what the guarantees are, what the value of the guarantees are, and when they take effect. Fraser Heath Financial Management can help you do that.



Here’s the full list of risks that concern the FSA about with-profits taken from the FSA’s Financial Risk Outlook 2010, pages 8 and 9.

• Investments that may not be appropriate to the with-profits fund, and which prevent policyholders from receiving fair value in any pay-outs or bonus distributions.
• Policyholders bearing costs that are not related to the running of the fund;
• New business being written on terms that are likely to be detrimental to existing with-profits policyholders;
• Governance that does not properly protect with-profits policyholders’ interests or take their interests into account in actions taken by the firm;
• Investments that may not be appropriate to the with-profits fund, and which prevent policyholders from receiving fair value in any pay-outs or bonus distributions. This may also be caused by low levels of excess capital resources within a wider group structure prompting utilisation of with-profit estate capital for support of strategic investments, such as intra-group or contingent loans, in a way that is detrimental to policyholders;
• Customers not receiving sufficiently comprehensive, timely and clear information to enable them to take a reasonable view of the risks and benefits of their with-profits policy;
• Firms whose new business volumes are materially diminishing, and those running closed funds, which are not fully addressing financial or operational risks and not acting early enough to formulate and implement coherent plans to distribute assets held within the fund in a way that is fair to all policyholders;
• Outsourcing administration and asset management functions (for the purpose of rationalising or controlling cost bases) which magnify conflict of interest issues, particularly where the outsourcing provider is connected to the firm; and
  
• Firms not using tools such as Market Value Reductions (MVRs) fairly and proportionately to ensure all classes of policyholders are treated fairly.
  

Some of the above risks become more acute in recessionary or volatile market conditions. For example, recent conditions could have the effect of exposing any previous pricing weaknesses where terms of business were written with heavy guarantees that are not self-supporting. This could lead to a firm seeking to offset the cost of such guarantees by reducing bonuses, increasing charges to policies and increasing MVRs in a way that is unfair to policyholders. It could also create an incentive for a firm to use inherited estates and existing policyholders’ funds to finance the guarantees for new business. Such actions could be unfair to other policyholders and lead to adverse perceptions about the firm or the sector.

Aviva last improved their MVR rates in October 2009. Although investment sentiment had improved by the time of their Annual Bonus Announcement in January 2010 they declined that opportunity to improve rates further. In view of the investment turmoil generated over Greece and the eurozone, and concerns over the strength of sterling and government gilts, we were surprised to discover yesterday that Aviva had improved their rates this month (May 2010).

Unusually Aviva have not yet commented on this action. There could be many reasons for this and we hope that we will get an announcement in the coming days. In view of the stock market correction of the first two weeks of May, this quiet improvement could signal a good time for Aviva with-profits policyholders who have been dissatisfied with their policy to get out of the fund as it implies that the surrender values and transfer values will be close to their true worth (asset share).

If you are thinking of surrendering your Aviva with-profits investment be sure to check the value of your guarantees and seek independent financial advice if you are at all unsure. We'd be pleased to hear from you. For more about this change, there's a new entry on the With Profits Health Check blog. 

The May edition of Moneyfacts magazine included a detailed review of the past performance and future prospects of With Profits Bonds. The article included a number of comments from Fraser Heath Financial Management's Head of With Profits Research Miles Hendy. Here's a few extracts from the article.



Some commentators believe that there are clear parallels between 2003 and 2009 as far as with profits funds are concerned. "In both years, falling share prices in the preceding year meant that many with-profits funds had to move in to less volatile investments to ensure they stayed solvent," elaborates Miles Hendy, a Chartered Financial Planner and Head of With Profits Analysis at Fraser Heath Financial Management. "Taking Scottish Widows, Aviva (CGNU) and Legal & General as three examples, in 2003 the average exposure to stocks and shares of these companies’ with-profits bond funds reduced by 18% from the year before and in 2009 the average equity holding of these three reduced by 11% from the year before. Selling out of shares at or near the bottom of the market means that they don’t fully enjoy investment returns when markets recover. So in 2003 the average cautious managed unit trust grew by 15.3% while the average growth of these three with-profits bond funds was 11.9% and in 2009 the average cautious managed unit trust grew 15.6% while the average of these three was 9.7%."



Given the annual bonus excesses of the past, it is perhaps understandable that most providers continue to tread carefully where these are concerned, with bonuses currently around 2.25% to 3.75%. "Bonuses increase the guaranteed returns that the insurance company have built in to their with-profits plan," comments Miles Hendy "In many cases the guaranteed returns are now far in excess of the policyholder’s asset share (the true value of their investment based on money invested and the growth experienced on that money) and it would be folly for insurance companies to increase these guarantees further by adding on generous bonuses. A low bonus rate or a 0% bonus rate is not necessarily a problem if the policyholder already has generous guarantees."



"New business sales are evidence that the fear of loss weighs heavily on investors’ minds and that there is high demand for cautious investments," concludes Miles Hendy. "With-profits can survive, but in order for it to thrive again it needs to overcome some extremely difficult challenges. If it can find a way of offering guaranteed returns combined with low costs and reassurance about investment efficiency, and combine that with a proper education programme for “new model” advisers then it could pull through. If I were a betting man, my money would be on it becoming increasingly marginalised."



For more information and advice on your With Profits policy, please email miles@fraserheath.co.uk or call him on 01454 327788.

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.

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.

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.

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.

With Profits Health Check was relaunched in 2009 following increased demand from concerned clients about their with-profits policies. For details of news releases issues in 2009, please visit our archive section.