Prospects for With Profit Bonds

T

Troy

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What [broken link removed] fails to allude to are the huge reserves of CGNU which will ensure that bonuses don't fall too far.
 
Your right of course

Hi Troy, Woodsie, hasn't been slow in the past to hijack his actuarial position to promulagate an Ark Life view. This is merely more of the same, through a journo who does'nt like wp investment. It was unbalanced, and AIIM's investment track record of below peer returns wasn't visited. I thought Woods performance was opportunistic at best, and mischievious at worst.
 
Re: Your right of course

Hang on a moment Ark Commercial.

For years, every journalist and almost every broker has been pushing with profits bonds. There has been no balance as there have been very few people questioning them. As a result, they have been the best selling investment product - €1billion invested last year apparently.

MVAs were dismissed as a technical possibility. Terminal bonuses was where the big money would be.

Now MVAs are very much a reality. Terminal bonuses seem to be disappearing.

I accept that there are two sides to the argument and the anti-wp side has been aired frequently on Askaboutmoney. But it's very rare to see this viewpoint in the popular press and it's not fair to accuse someone expressing these views as "hijacking their actuarial position", as "opportunistic" or as "mischievous".

Brendan
 
Ok

Ok, I withdraw. The comments had no commercial intent, and the fact that Ark hasn't a WP fund is irrelevant.
 
WP

These products were an easy sell,and regrettably ,were often mis-sold.

Troy adverts to CGNU's reserves ; this is relevant in relation to the possibility of a solvency crisis being brought on by the 'black hole' behind WP. .

However the reserves are a red herring in terms of the points made (opportunistically) by Brian Woods.Future bonuses will be determined by the value of the assets backing the WP funds and will not be propped up by the company's own reserves.

In a climate where future bonuses are probably going to be low (closer to 3% than 5%) surely it is harder than ever to rebut the argument that the high year 1 bonus offered by Hibernian is likely to cause unrealistic expectations.
 
Agreed

Hi Raul,

You got there before me. I agree completely. Wasn't Ian Veitch (of Hibernian) quoted as saying he felt annual bonus rates of 3-3.5% p.a. were sustainable. So how the f**k are they offering first year bonuses of 8% or 9% ???
 
Future Bonus Rates

Dogbert says:<!--EZCODE QUOTE START--><blockquote>Quote:<hr> "Wasn't Ian Veitch (of Hibernian) quoted as saying he felt annual bonus rates of 3-3.5% p.a. were sustainable. "<hr></blockquote><!--EZCODE QUOTE END--> Yes he was and that was after predicting that investment returns would be 8% to 10% and before deducting 0.5% admin charge. Hey that's one heck of a difference. Only goes to show how big the Black Hole is.
 
Expected WP Returns

Gosh


These comments are getting close to the bone !

The truth hurts - key point is that WP policyholders will get the return from the WP pot - there are no huge reserves

......but IFAs just want the line of "here's equity investment without the risk" and thanks for the commission
 
Prospects for With Profits Bonus Rates

As I understand WP, the intent is that each policyholder will broadly get their "asset shares".

So, if indeed bonuses fall to 3% to bring current WP policies down to asset shares, anybody investing now needn't worry as they too will get their asset shares through the vehicle of the Terminal Bonus.
 
C'mon Troy

... you're smarter than that. Where are the terminal bonuses going to come from ? The fund is seriously underwater, and you're paying out 9% first year bonuses to new entrants, plus over the odds commissions to brokers. There won't be anything left to pay any terminal bonuses.
 
First Year Bonus

<!--EZCODE ITALIC START--> Doggie<!--EZCODE ITALIC END-->, the extra bit of first year bonus is a complete red herring and you know it. It is funded out of the charges and not out of the fund performance. This is all about smoothing. CGNU has enuff resources to smooth over 20 years and even a 30% shortfall is irrelevant over that timespan. Prospective Hibernian WPB customers can be quite confident of receiving broadly their asset shares through a combination of (reduced) annual bonuses and a terminal bonus. There is no problem here, despite the begrudgers.
 
Liberty Escalator

Hey, isn't this fun. If you think WPBs are bad, spare a thought for the (many) poor sods who jumped on the Liberty Escalator.

The last thing Liberty wanted was a sharp fast stockmarket reversal. That is because the formula kicks in and they automatically dump the fallen equities (after they have fallen of course) and go into bonds - the deal with their guarantors is that they <!--EZCODE BOLD START--> must<!--EZCODE BOLD END--> dive for cover.

In the unlikely event that markets rebound the nightmare for WPB customers will be just that, a bad dream, everything will be back on song, Terminal Bonuses the lot.

With the Liberty Escalator the nightmare is frozen into reality. I wonder how many of those who jumped on the Escalator are now aware that all they can look forward to in 5 years time is their money back <!--EZCODE BOLD START--> no matter what happens in future to the markets<!--EZCODE BOLD END-->:lol :evil
 
Hib WPB

hi troy, maybe i'm dim but can you please explain how the upfront bonus is paid out of charges
 
First Year Bonus

<!--EZCODE ITALIC START--> Shaggy<!--EZCODE ITALIC END-->, this is as I understand it and I repeat that I have no connection whatever with Hibernian, CGNU, Aviva.

The Annual Bonus and Terminal Bonus comes out of the (smoothed) investment return. The extra bit of First Year Bonus is akin to an extra allocation. It will be funded out of the annual management charges - I think.
 
First Year Bonus

The With Profit Fund does not cover the cost of any additional 'bonuses' in year one i.e. over and above the current 5% regular bonus rate.
 
First Year Bonus

There are ongoing charges on WP Bonds. These may be explicit (i.e. "we will charge x% of the fund each year") or implicit (i.e. we won't tell you but will do it anyway). The latter should appear in the disclosure quotation in any case. Some of these charges would cover the cost of the first year bonus.

Then of course there is the surrender penalty. Basically this is a percentage charge on the units of the fund which declines as time goes on. So, if you take out a policy, get allocated the first year bonus and cash it in shortly afterwards, do not expect to get your money back (and thats before MVAs).

With regard to Brian Wood's comments...whether he is right or wrong depends on how the life insurer will smooth out the returns. This apart, a couple of comments :

1. If WP Bonds produce a return of 3% p.a. for the next 10 years, unit linked bonds are likely to produce the same!

2. If you took out a WP Bond and UL Bond on 1.1.2002, in theory the WP Bond should produce a higher result as there should be smoothing down of poor investment returns. There could be one terminal bonus per year of purchase of units. By definition this would be based on the "average" return for the year.

3. If you took out a WP Bond and UL Bond today, the opposite should be the case as there would be smoothing as life insurer would want to build up its reserves.

Now here's the question, it could take a long time to build up the reserves. Given the hit that life insurers have taken over the last number of years, who's money is used to rebuild reserves? The policyholder's or the shareholders money? Answers on a post card please!
 
Told you so

Today's Sunday Tribune sets the record straight.

There are lots of Regular Premium WP policies going back 20 years in Hibernian. These will be well in the black and their surpluses can be used to plug any Celebration Bond "black hole".

Also the "black hole" isn't as bad as was claimed as presumably the 15% MVA represents the full extent of the "problem".

Yes, new policyholders are obviously inheriting a "black hole" but that does not negate the many advantages. Smoothing was obviously going to be a two way process.

I tend to agree with the Tribune article that anybody making exaggerated assertions about the extent of the "black hole" is some sort of schizo (or whatever the medical term that was used).
 
Re: First Year Bonus

Hi Troy

Did the Tribune assert that or was Niall Brady merely quoting the Hibernian spokesman?

I got the impression that Niall was presenting both sides of the argument and letting the readers decide for themselves.

Brendan
 
With-Profit Roulette

Influential analyst Ned Cazalet has made a blistering attack on Standard Life's with-profits strategy, calling it the man that will not leave the roulette wheel and is praying for a win to get him out of trouble.
Speaking at a round table meeting organised by F&C in London last week, Cazalet said the Scottish mutual has seen reserves plummet from about £10bn to just over £1bn.
He said the company's dogged adherence to a high equity backing ratio for its with-profits fund has transformed its risk profile.
He said: "It has gone from boring beige to being a psychedelic hedge fund."
Cazalet said Standard's current payout policy, thought to be 130 per cent of asset share, without a market value reduction was unsustainable. Despite three consecutive years of stockmarket falls, Standard, along with Liverpool Victoria, is one of the few companies not to have imposed an MVR.
Standard deputy group financial director David Bentley says: "We are only one of six life companies worldwide to have a triple-A rating from Standard & Poor's and Moody's. It is the right policy to be heavy in equities - we would not want to sell equities when the markets are low."
He declined to comment on surplus, payout policy and what action it could take to shore up solvency in the future but said the position regarding imposing an MVR is being monitored very carefully.
Cazalet said: "Standard is taking riskier and riskier bets - it is the man who cannot leave the roulette table and is praying for a win.
"Eventually Standard is going to have to sell - it is not the Sultan of Brunei. But if they sell out of equities now, they will never get back in."
 
No Future for With Profits

The FSA has sounded the death knell of the with-profits name after its head of with-profits review Eleanor Linton described the term as a misnomer and questioned its future.
Speaking in London last week at the IBC conference on the future of with-profits, Linton said the with-profits name created confusion and questioned whether it applied to funds that did not participate in companies' profits.
Linton also indicated that companies could be forced to rename their with-profits funds as smoothed managed in cases where policyholders do not share in the profits of the fund. Such a move raises the prospect of mutual offices being able to offer with-profits but not proprietary firms.
Linton said there could be a role for Cat standards for with-profits but said the FSA was not looking to design products by regulation.
She said: "Does the term with-profits really apply? It is very difficult to carry on with the name with-profits. It is a misnomer as it is applied to many funds."
Also speaking at the conference, ABI head of life assurance Kate Flavell said: "The with-profits name has mud clinging to it. Perhaps it is time to change the name."
Speaking to Money Marketing, Linton said the FSA and Sandler - who is predicted to recommend the ringfencing of with-profits - had shared their findings. She said what companies could call their funds could depend on whether they are mutual or proprietary.
Standard Life head of with-profits communications David Hare says: "A lot of what is called with-profits is, in fact, investment returns plus smoothing. If the name was changed, I suspect that people will carry on calling them with-profits. The important thing is that people understand the difference between the different products and providers."
 
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