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It is estimated that there are between ten and twenty million with-profits policies in existence in the UK with a totalThe With Profits Marketworth of about £400 billion. However, it is not known precisely how many policyholders there are, as it is likely that some individuals will hold more than one product, possibly from different providers. Some with-profits products are pure savings vehicles, notably with-profits bonds, which became popular in the 1990s.
Other with-profits products are designed to fund particular financial commitments, the main two being mortgages and pensions. Policyholders may be relying on such policies to pay out a minimum amount to cover their mortgage or to purchase an annuity when they retire.
Over the years most insurance companies have offered with-profit plans. Some companies have been pure with-profit offices and others have been unit-linked offices, not offering with-profits at all. Most companies have offered both types.
The market is hugely complicated by two aspects:
- The fact that there has been huge consolidation in the insurance industry. For example, 15 years ago three companies existed: Commercial Union (CU), Norwich Union (NU) and General Accident (GA). All were large multi-faceted insurance organisations. Initially CU and GA “merged” to form CGU and then later on this organisation merged with NU to form CGNU. Quite rightly the company saw this as a complicating the picture and reverted back to the name Norwich Union. This has now become Aviva. Somewhere amongst all of this are people who took out policies with one or more of the original companies who will still hold a with-profit plan from those days when the companies were independent.
- Allied to this is the fact that single companies have offered many types of with-profit plan. Some are traditional with-profits, some are unit-linked. In some cases companies offered series of plans, all with different terms. In the late 1990s for example, Friends Provident issued a number of with-profit bonds and called them series one, series two and so on, all with different terms, bonuses and guarantees attached.
This is why the with-profits market is so difficult. There is no consistency for investors to follow and there could be two people with bonds, for example, with the same company who have totally different terms applying.
Why is £400 billion invested in with-profits plans, when it should, surely, be a fraction of this figure? Because investors are often stuck: sometimes this is due to the terms and the fact that investors genuinely are better off sticking with their plans/bonds, sometimes this is due to an intransigence on behalf of investors simply because they cannot properly understand what they have got.
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