Why With-Profits is a Scam

If you walk into a shop to buy a tin of beans and you get home following your purchase, open your tin and find that it is full of mush, something inedible, and definitely not beans you would probably feel you’d been scammed? Or if you buy a high end car and then find it has the performance of an old banger, likewise you would surely feel you’d been ‘had’.

And this is what you get from (most) with-profits policies and investments.

Really, it’s the name that’s the problem. Because a whole chunk of the with-profits market is not really “with-profits” at all….

In olden days with-profits represented a position where you as an investor or saver, policyholder or plan holder, shared in the profits of the Insurance Company with which you took out your policy.

With-profits of any type was intended to offer you a ‘steady as you go’ investment which offered a significant element of risk shift. You were shifting the risks of your investment or plan back to the insurance company.

It is far from an exact parallel but the idea was not dissimilar to house insurance.

In the old with-profits market, the Insurance Company received your money in the form of a regular premium (savings) or a one-off lump sum and took much of the underlying risk onto themselves, smoothing the ups and downs of market returns to provide you with a regular bonus with some nice guarantees thrown in. You got a more reliable return in exchange for a lower long term return. As with house insurance the insurer managed the risk.

And this worked for decades until the time came when the insurers got greedy, tried to buy in business through aggressive marketing of returns, got themselves into a hole and then found they couldn’t produce the excessive promises or commitments they had made and were incapable of delivering the reliability. This coincided with a widespread demutualisation of the insurance companies, whereby they gave up their previous mutual (customer owned) status and shifted to a shareholder owned basis.

At this point they should have dropped the name with-profits and the pretence they were continuing to operate with-profits in the same way. But they didn’t.

And today this leaves us in a position where hundreds of billions of pounds is still invested in so-called with-profits investments, but they are effectively giant ‘managed’ funds, with the risk, more often than not, now with the saver/investor/policy holder/plan holder.

If you have any form of with-profits investment then ask yourself this: are you in an investment (or plan/policy/pension, whatever form it takes) which today is managed on the same basis as you were sold?

We would suggest that in millions of cases the answer will be an unequivocal “NO!”

In which case you have bought a tin of beans which is really mush.

Is this true of every with-profits investment in the UK today? No, there is still some semblance of good performance and good prospects amongst some of the companies and a close proximity to the original with-profits concept.

However too many companies simply rest on policyholder ignorance of the real position and they posture as if they are still managing with-profits as before, whereas in fact they are managing a dud fund with dud prospects (with the very notable exception that the prospects remain good for the insurance company because they get large fees for doing very little).

We accept that this may be far from fraudulent and we do not suggest there is any aspect which could be labelled, in the strictest terms, fraud.

However it is knowingly deceptive because where there are funds describing themselves as “with-profits” and those funds are today operated to a completely different set of standards, the owners and managers of those funds know that there is no basis for returns to be achieved in any way that could be described in with-profits terms. In this respect we feel this is a scam.

If you are in a with-profits investment, have a with-profits plan or policy, or are in a fund with this name, then – in our view – you should seek to find out if some or all of the above applies to your position. Because if it does you may, at the very least, want to know what you really hold and what your realistic prospects are into the future.