The market
In 2019, the Financial Conduct Authority published a thematic review of with-profits providers. It found that at the end of 2017 approximately £274bn was invested in with-profits funds, compared with around £426bn in 2001.
By way of context, in 2017 about £1.14tn was held in unit-linked funds. With-profits, therefore, accounts for around 20 per cent of the market.
During 2017, the FCA found, new premiums worth around £16bn were paid into with-profits funds, while £23bn was paid out. This was in part a reflection of demand but also of supply.
Many with-profits funds were placed into run-off over the past two decades and are no longer open to new business.
This is by no means a universal trend among larger insurers (Prudential, for example, still actively markets with-profits policies) but it does help explain the figures.
Nobody can predict the future, but if you believe investment markets are likely to remain volatile, and interest rates will remain low for some time to come, then modern with-profits policies may once again come into their own.
In particular, investors with a fixed time horizon (for example planned retirement or paying for children’s education at a particular future date) could potentially benefit from the more predictable returns offered by with-profits policies.
Regulation and capital adequacy
Many people in the wider financial services sector still hold a view of with-profits that is based on the 1990s. A huge amount has changed since then.
With-profits investments rightly came under major scrutiny following the closure of Equitable Life to new business in 2000.
That regulatory scrutiny has meant that with-profits are now among the most highly regulated, and scrutinised, financial products in the UK.
Today capital adequacy is the number one priority, and providers are required by the Prudential Regulation Authority to hold adequate capital to cover all their liabilities.
This figure is assessed both by the provider itself and by its regulator, and the provider should publish details of its current solvency capital coverage.
Many of the sector’s problems from two decades ago were caused by providing guarantees that matched, or even exceeded, the performance sometimes achieved by high-risk funds.
Modern with-profits funds are usually designed to appeal to more cautious investors who prioritise an element of predictability over the possibility of ‘shoot-the-lights-out” performance, and providers tend to manage themselves according to similarly prudent principles.
Principles and practices of financial management
The key document for advisers assessing with-profits products is the fund’s Principles and Practices of Financial Management, which all providers are obliged to publish on their websites.
The PPFM provides detailed information on the business model used by the provider to meet its duties to policyholders and to respond to longer-term changes in the business and economic environment.
