Why With-Profits confusion reigns

It is a fundamental economic principle that people act and are incentivised by their own self-interests.

This is certainly the case with companies and in many ways, so it should be. They act for the benefit of their own interests, those of the owners and directors, managers and staff.

This is relevant when it comes to with-profits investments and policies in a way that may not, at first, be obvious.

To understand this we have to start by explaining that the with-profits funds operated by Insurance Companies have around £300 billion in them. Money that was accumulated in the main during a strong surge of sales during the late 1990s and early 2000s.

Today this money is housed in these funds with virtually no (zero) new sales – many of the companies have no new sales at all. They are closed funds, closed to new business. Even some funds that are not closed have no fresh money flowing in. Those that are open for business have a trickle of new sales.

Across the whole of the with-profits sector sales have collapsed.

You may consider this a disaster for the with-profits industry. Actually it is the opposite, provided they can hold on to their existing funds (i.e. stop a serious outflow).

This is because acquiring new money is expensive: sales teams, commissions and support staff to administer everything, adds up to quite a hefty acquisition price. All the money (profit) for the Insurance Company managing the with-profits is in the years after they take their customers money from them.

To highlight this think of a smaller with-profits fund managed by an insurance company that has, for example, £2 billion in it. It is probable that the typical annual management fee on this fund is around 1%. Assuming it is 1%, what level of annual fee does this produce? 1% of £2 billion is £20 million.

£20 million per year…….

How much does it cost the insurance company to manage this with-profits fund? Nowhere near £20 million. They no longer have sales teams or marketing costs, they have limited administration costs (because they only now have to service policies).

A £2 billion fund is likely to be represented by around 100,000 policyholders. Good systems mean that they can probably manage this number with 200 staff (say costing them £5 million per year). There are computer systems and office costs and they will probably have to pay a fund management team, actuarial costs and accountancy costs. There will be regulator fees and some other miscellaneous costs maybe all adding up to another £5 million.

These sums are estimates and are only meant to be indicative. However the fact is that having a fairly benign with-profits fund is a hugely profitable business. In this example £20 million in fees or revenue, £10 million in costs, per year. On this basis producing a profit of £10 million – each year!

The Insurance Company has no interest in doing anything other than milking this for as long as they can.

It is with this in mind that we return to the subject of self-interest.

If with-profits has become too difficult for policyholders to understand is it in the interests of the Insurance Company to clear the mist? No, because it may cause people to run for the exits and take their money away from the Insurer.

A major reason why people stick with with-profits is because of a lack of clear understanding of what they really have; how else could you explain why so many people with such appalling long term performance would?

Policy terms and wording which include “the PPFM” “terminal bonuses”, “market value reducers”, “orphan assets” and “inherited estate” are a mystery to even the most financially literate.

Is it fair to assume that the insurance companies have no interest in making it easier for people to understand what they have got? Or to help by putting in place easier-to-understand language, better explanations of what is really go on and making everything more transparent in general?

We believe that part of the with-profits problem is that the Companies who manage and operate these policies on behalf of policyholders have no incentive to help policyholders in this regard. Worse they have an incentive to keep policyholders in the dark.

Many of these companies get handsomely rewarded for appalling performance; there are many funds with hundreds of millions of pounds (or billions) which have dire track records and dire future prospects. They (the insurance companies) are very happy indeed that it is difficult for policyholders to see the true state of things.

They want confusion to reign, because it is in their corporate “self-interest” for this to be the case. It is definitely not in the policyholder’s best interest.


If you have a with-profits policy or investment we can help you cut through any confusion and show you what is happening ‘underneath the bonnet’; that is our function, to produce individual and bespoke reports based on your position with your policy. Click here to find out more.