Standard Life MVA

K

KMcD

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Standard Life cuts bonus and imposes MVR

Standard Life is cutting terminal bonus by ten per cent and
imposing a market value adjuster of 10 per cent.

Standard says it has been forced to take this action following
recent stockmarket falls and some recent increases in
withdrawals.

Standard Life group finance director John Hylands says: "We
have taken this action to ensure all our policyholders are
treated fairly, both those who withdraw their money from the
with-profits fund and those who remain fully invested. This
decision has been taken in response to recent investment
market conditions, not as the result of any deterioration in the
company's financial position which remains strong and secure."

Source : MoneyMarketing

This is in respect of UK business, so it is only a matter of time before it applies here.
 
MVA

BTW

IMHO - We can thank the media frenzy for this action.
 
Liars

SL says <!--EZCODE QUOTE START--><blockquote>Quote:<hr> <!--EZCODE ITALIC START--> "We
have taken this action to ensure all our policyholders are
treated fairly, both those who withdraw their money from the with-profits fund and those who remain fully invested. "<!--EZCODE ITALIC END--><hr></blockquote><!--EZCODE QUOTE END-->Maybe not quite a lie but definitely economical with the truth. SL has <!--EZCODE BOLD START--> three<!--EZCODE BOLD END--> classes of policyholders, those who withdraw, those who remain AND <!--EZCODE BOLD START--> those who are joining up<!--EZCODE BOLD START--> . Yes, the MVA is helping to treat fairly the first two categories but the last, the newcomers, are being sold a pup. Why are they not allowed in at 10% discount if those who are leaving are suffering 10% penalty?

Why, Why, Why in all this passion for fairness do companies (with the honourable exception of CL) not tell it as it is for potential new customers? Answers on a postcard<!--EZCODE BOLD END--><!--EZCODE BOLD END-->
 
MVA

Paster, dont follow you at all at all.

If I was a long term investor why should I be worried about an MVA? or in SL case a UPA.

Also why do you consider CL's action honerable?

S
 
The BH

High S, nothing at all wrong with a MVA or even a UPA. About time SL imposed one instead of all this macho "it doesn't apply to us" millarkey. Put if they are belatedly being so fair with existing policyholders why not also be transparent with potential newcomers and admit that the BH means it is very unlikley they will get a fair return on their investments, even over the long term. The answer is of course that it takes courage to turn away new business, a courage which so far has only been forthcoming form the honourable folk at CL.
 
Symetry

Agree totally with Paster - taking money in from new investors at a price well in excess of that at which you will let people leave cannot be other than a bad deal for new investors.

Even as a long term investor, the idea of buying into an accumulated deficit of 10%( & the real figure is almost certainly 20%+) is simply not bright.The scale of the deficit must be an issue even to long term investors.

Each time I see the SL fund being advertised(very clever btw),I wonder how many more 'innocents' are being 'suckered in'.

I am reminded of a very similar discussion which took place on AAM some time ago in a thread relating to Irish Life's Secure Performance fund.With the tax deadline coming up at end October, how many thousands of people (& millions of Euro) will go into a Fund which is somewhere close to E100m in the red ?

These investors will get a rude awakening when the bonus for next year( & probably the next number of years) comes in just above zero.

As an aside,this is the default option on their Personal Pension product(marketed as 'Navigator').

The defence that this is only open to regular contributions starts to ring hollow when the deficits get so large.The ostrich syndrome is alive & well ( particularly with advisers) but the day of reckoning is coming......
 
MVA

Where have you been the past 170 years?

CLs PR of their WP fund closure was a complete disaster. If the message you received elevates them to 'honourable' status then you have have just become part of this damage limitation exercise.

S
 
MVA

S
Please explain why you feel Canada Life's pr was a complete disaster ?
Ross
 
Odd

With all of the bigger rip off's going on in financial services, like retail banking margins, a set up on IFSRA, lack of disclosure enforcement, lack of disclosure rights on top ups, unregulated activities, over-blown drawdowns from unsmoothed funds that haven't been reviewed, leading to litigation etc etc, why is it that with profit funds applying MVR's in a severe bear market, is the principle heat on AAM judging from this and other threads?

While it's a worthy debate, isn't it the case that what we're really seeing is a debate between UL and WP going back into the 1970's. That really the WP critics couldn't give a stuff about the consumer, that it's merely a badge of convenience to go competitor bashing?

Because if there is a genuine interest in the consumer it certainly isn't registering in much more important other matters that count. This debate smells like a commercial one. If so at least let's be honest about the motivation, and stop shedding crocodile tears.
 
Reality Check

Dear, Dear, Sir Galahad, so naive. Of course, nobody but nobody has the consumers' interests at heart above their own.

That is not the point. In today's conditions, WPBs are a clear rip off of new consumers. It is not down to moral forces to expose this rip off - that is not the nature of our society. Instead it is down to naked competitive forces to present the truth. What's wrong with that?

The fact that anti Fianna Fail interests are doing there damnest to exploit the core rottenness within that organisation does not negate their arguments? Similarly the fact that the main exposees of the rottenness within the state of With Profits may have an axe to grind does not of itself negate their arguments.

The fact that CL itself has come out with its hands up clearly underpins the arguments of the anti WP brigade, no matter how self interested their motives.
 
present the truth

The terms of a SL policy allow them to impose an MVA. SL still have stg£2 billion in the bag. The terms of a CL policy allow them to 'close' their fund (why not to pensions I ask in passing?). Its not a point of honour but a few contributors to AAM are product providers delighted to have a stab - how much more blatently obvious could this situation be! (Trinity v UCD!)

There is no difference between whats happening to WP funds and equity markets in general and surely we cannot expect "competitive forces" to present the truth!

Sumatra
 
Diamonds in the Rough

I am struggling a little with why are people insisting that there is a black hole in with profits funds? And why new investors should get a discount on entry?

With Profits has been explained to me along the following lines:-

Policyholder A - invested in 1998, annual bonuses added = 25%, underlying fund performance is -10% (figures made up and not crucial to the argument). This policyholder should expect lower annual bonuses going forward certainly, as to do otherwise would be imprudent on behalf of the insurance company. This policyholder is likely however to have significantly outperformed an equivalent policyholder invested in unit-linked funds - even with a UPA / MVA. This policyholder will likely suffer from limited growth potential going forward as the company manages back bonuses. ALL OF THIS I CAN UNDERSTAND (and seems reasonable)!

Policyholder B - invests in 2002. The company may declare lower bonuses into the future (conscious of their liabilities from Policyholder A).

This of itself is not a major issue. Where the underlying asset performance warrants it, companies can pay 'terminal bonus' to policyholder B to bring the amount in line with the amount that they want to pay out. Maybe not transparent, but an actuary looks after the policyholder’s interests, and the Irish Independent today (10th October) shows that exiting policyholders are doing fine.

I do agree that there may be a potential problem, but commentators appear to be content to simply use one large tarred brush.

Life assurance companies will encounter problems where either (a) they can't manage back the payouts for policyholder A quickly enough and/or guarantees kick in (Equitable are an extreme example as they misjudged the GAO problem), or (b) can't get capital to finance the short term overpayment to Policyholder A type with profits policies (some overpayment is expected).

So avoid the sector?

No, although IMHO there are concerns that some of the key participants need to address (and have not done so to my satisfaction to date).

To take the two main players:-

Hibernian wrote huge volumes of WPB business during the highs of the stockmarket (late 90’s), with high levels of guarantees (no MVA at maturity) and an inflated year 1 bonus. They would make me nervous due to the potential magnitude of the problem within their fund.

Standard have persisted with a high equity backing ratio, have given endowment mortgage promises and are a mutual - no access to equity markets (albeit they have can and have issued debt). The AAA rating is a definite consolation however, although the S&P rating for WorldCom and Enron prior to their recent falls from grace has been noted elsewhere on this site. I'm no longer sure that a demutualisation 'punt' would be enough for me to recommend them - not sure any more how much there is to give away!

I will continue to recommend with profit bonds for clients looking for stockmarket exposure with a level of guarantee. There are plenty of providers - challenge is to identify the diamonds in the rough!

And then look forward to the Indo survey in 2022.
 
With Profits Black Hole

I absolutely agree with <!--EZCODE ITALIC START--> Mauns'<!--EZCODE ITALIC END--> diagnosis of the situ though not her prognosis.

Policyholder A is 35% underwater.

This is only an issue for Policyholder B if bonus reductions do not fill in this hole before A cashes in.

Most of these funds are now more than 50% invested in gilts earning 4.5%. The equity portion might be expected to earn 7% if they ever find their correct starting point. So let's say an overall expected return of 5.5% looking forward. Knock off charges and we're down to say 4% to cover bonuses. Let's say bonuses are cut to 3%. That means the BH will be filled in at an expected rate of 1% per annum.

Policyholder A got in in 1998, maybe 3 to 6 years before she has a Guarantee date. The BH will have reduced from 35% to around 30%.

But, I hear you say, Policyholder A probably won't wait till the Guarantee Date. Very true. On "premature" encashment there will be an MVA of 10% or 15%. So the premature escapees will leave behind a BH of say 20% to 25%.

No matter which way you look at this, Policyholder A is going to leave behind a very substantial BH even if stockmarkets rebound, because the funds have already run for cover.

Who will inherit this BH? Policyholder B of course. The very worst situation is where there are lots and lots of Policyholders A and Policyholders B dry up as the BH burden will then be hugely magnified.

As the Indo survey points out the returns on 2001 matring WP policies are that good because early exits were being screwed. <!--EZCODE BOLD START--> The exact opposite syndrome is now unfolding<!--EZCODE BOLD END--> A very substantial body of policyholders will get much more than they earned. It is today's new customer who will shoulder this burden.

<!--EZCODE ITALIC START--> Mauns'<!--EZCODE ITALIC END--> posting, which I take to be in good faith and clearly very well informed, highlights how insidious this deception is. Clearly <!--EZCODE ITALIC START--> Mauns<!--EZCODE ITALIC END--> believes that there is enough flexibility within the Terminal Bonus and that the MVAs are adequate enough to ensure that potential new customers can, by and large, expect to receive a fair return on their assets.

When is the Regulator goin' to make a public statement that blows all this actuarial mumbo jumbo and misrepresentation to smithereens. This would serve us all a lot better than showing yellow cards about Headline First Year bonus rates, which are a mere bagatelle when compared to the cover up of the <!--EZCODE BOLD START--> Black Hole<!--EZCODE BOLD END-->
 
WP BH

Some observations:-

It is accepted that the nature of With Profits is such that some willl leave with more than they deserve, and some will leave with less. This I accept as a symptom of smoothing of returns.

Actuaries have a responsibility to manage the business a la the application of a UPA / MVA; asset allocation; level of business written; level of guarantees offered. I expect them to act in the best interests of policyholders I place with any individual company.

Eagle Star for example (and I have no connection - merely an example to demonstrate my point) - defensive asset allocation, low level of guarantees (on single premiums). I'd query the inflated annual bonus, but I'm reasonably happy with the broad outline of the management of this fund.

All I'm saying is that it is possible to construct a doomsday scenario, but that is to close one's mind to with profits as a concept. I don't believe that all comapnies are in the same boat / have similarly sized black holes. Some companies manage with profits more appropriately than others. Thats all.

On terminal bonus flexibility, what I hoped to have communicated was that all else being equal, lower annual bonuses implies higher terminal bonus. Lower annual bonuses does not of itself mean that returns will be worse (except in the very short term).
 
sense

Paster's latest posting describes what is happening with great clarity.From being quite adamant in his/her secondlast posting Mauns' last fails to respond in any substantive way.

I believe Mauns(though clearly intelligent & well-informed) is sufferring from an inability to accept facts which call into question one's past judgements/actions - I gather the professional term is Cognitive Dissonance.

Reality calling - new money going into these funds is buying a pup & advising clients to do so is,to be charitable about it, highly questionable.
 
Am I missing sumfin'

There seems to be a general consensus, whether one is pro or anti, that an example of existing WP policyholders being say 35% underwater is not unreasonable. It is also a matter of fact that most WP funds are now less than 50% in equities, the balance in bonds.

Hey, it would take a 100% rebound in equities in a short space of time to close this gap. But wait, a sudden surge of 100% in equities so that the nightmare is over, what does Mr Greenspan think of this? One thing's for sure you can forget all this 1.75% interest rate mullarkey. Interest rates will be spiked sharply upwards. Anybody following the drift? <!--EZCODE ITALIC START--> Mauns<!--EZCODE ITALIC END-->? You spotted it, the bond portion of the funds will have fallen by nearly 30% substantially negating the equity rebound.

The situation is absolutely hopeless and everybody involved in the inner workings of these black boxes knows it.
 
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