In this period the payouts on with-profits endowment savings plans became a kind of symbol of the strength, expertise and talent inherent in each company. So companies vied with each other to appear in the top placings of the annual survey of with-profits payouts.
And eventually, payouts lost connection with reality and with fair returns and were used primarily for marketing purposes to promote sales of new business.
So as the 1990s ended and the 2000s began with reducing interest rates and a series of poor stock market returns, the with-profits bubble burst. Payouts had to be cut and as the table below shows – they were cut hard.
As a result with-profits savings policies and investments proved to be a major disappointment to many savers. For some investors, projected growth rates turned out to be overly ambitious and their expectations for continuing levels of unrealistic payouts could not be met.
Also over this period, policyholders have come to expect a much greater degree of transparency in their financial products. Older style with-profits products suffer from a degree of complexity and opaqueness which makes assessing the value of your product hard to understand and which today’s generation of investors does not appreciate.
Despite all this, with-profits business retains a very strong presence in the investment markets, with total assets under management of around £300bn as at the end of 2014.
Is the historic perspective obscuring the benefits of the with-profits approach?
To paraphrase Warren Buffett: “It takes 20 years to build a reputation and five minutes to ruin it.”
Something similar could be said about with-profits business; after many years as the ‘poster boy’ product it fell short of customers’ expectations and is now trying to rebuild confidence and trust.
In my view, with-profits should be seen as a cautious, long-term investment vehicle that helps smooth out the bad years by keeping aside some of gains in the good years. The product really has to be invested over a reasonably long period in order to allow it to smooth out the peaks and troughs for a few economic cycles.
The more modern with-profits products have been designed to be more transparent with clearer charging structures, similar to unit-linked products, and a clear view of the investment strategy and smoothing policy. These appeal to the current generation of investors with their desire for transparency.
Recent payouts on single premium investment bonds show that there are some with-profits funds giving quite presentable returns over a longer period. From our analysis of a survey of payouts on investment bonds surrendered in 2015, the average payout of a little over £16,000 would have produced a return of around 5 per cent a year on an investment of £10,000 in 2005.
