Should With Profits be Banned?

The announcement earlier this week that Friends Life (soon to be part of Aviva) is having to compensate a bunch of with-profits policyholders because they didn’t properly allocate bonuses to them, highlights one of the great failings of with-profits investments.

It is laudable that this error was noticed, corrected and put right. However as far as we are aware not one of the policyholders affected knew they been allocated an incorrect bonus in the first place.

There was no ‘outcry’, no flurry of complaints, the policyholders were in the dark, and it was only an internal system check that uncovered the error.

Policyholders (across the board, across all companies) generally have no idea what to expect from their with-profits policy year on year. They take what they get (which more often than not, is not very much). Worse than this when they get their annual statements they have no real way of judging whether they have been given a fair deal, a good return or how well or badly their policy is performing.

Have you ever seen an annual report? Even seasoned with-profits experts find it tough to disseminate the information put in front of the poor policyholder.

There are many things wrong with with-profits, but it is this element of mystique which arguably stands above all others. Providers, the Insurance Companies, that manage the UK wide £300 billion (that’s right, £300 billion!), collecting somewhere between £3 billion and £5 billion in annual fees for “managing” the with-profits policies (honestly, they don’t take much managing), fire out impossible-to-understand information year after year.

What a great deal. A great deal, that is, for the Insurance Companies. When 1,200 policyholders can miss out on bonuses and not know about it, it highlights just how easy it is for these companies to happily sit above these with-profits funds, collecting eye watering annual fees, leaving policyholders in the dark.

The solution must surely be for with-profits to be banned? We do not mean banning the funds but banning the name with-profits (it is a long time since they were operated in a way that is even close to the original with-profits ethos) and banning the cloudy nature of how they operate and report.

A ban should encompass getting rid of the name with-profits and enforcing companies to provide transparency in the way the funds report their bonuses, making them akin to a building society which has to publish its interest rates or a loan company having to produce its APR.

The with-profits investor has no such comparable simple figure to equate to and they need such a figure; they need a base from which to compare with-profits with other funds and investments. They need simplicity and transparency and they need to know that their investment, today, is completely divorced (in most cases) from the traditional with-profits structure. Which the name implies it is still linked to. It isn’t. The name with-profits should be removed from these funds.