Why With Profits Plans Have Problems

Why With-Profits Plans Have Problems

Poor Performance

The immediate problem facing many with-profits investors is poor performance.

Many with-profits funds, as with other institutional and private investors, were caught out when the technology boom turned sour in 2000. With Profits Funds, which were then too heavily invested in stocks, were forced to switch into less risky investments to guarantee existing, and often overly generous, policyholders' payments. At the same time, new and more cautious with profits investment strategies, have meant investors have lost out on rising equity values.

Clarity and Complexity

With-profits policies have also been attacked for their complexity and opacity. Some investors feel that risks were not adequately explained to them when they signed up for the policies: a great many mis-selling cases at the Financial Ombudsman Service relate to with-profits policies. Meanwhile, it can be difficult for policyholders to get their hands on information about funds and investments.

Orphan assets

There has also been criticism over the way insurance companies treat surplus capital, known as Orphan Assets. Critics have accused firms of using the money as a slush fund to boost the interest of shareholders rather than safeguard policyholders' investments.

Closed Funds

Many with-profits plan are now closed to new business, causing problems for the investor in that when a fund closes, typically it moves away from investing in shares and moves towards, lower risk assets, which tend to yield lower returns, reflected in the bonus rates investors will receive.

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