# Prospects for With Profit Bonds



## Troy (29 Jul 2002)

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


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## Ark commercial (29 Jul 2002)

*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.


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## Brendan Burgess (29 Jul 2002)

*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


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## Ark commercial (29 Jul 2002)

*Ok*

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


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## raul (29 Jul 2002)

*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.


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## Dogbert (29 Jul 2002)

*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% ???


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## Rossy Fan (29 Jul 2002)

*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.


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## None (30 Jul 2002)

*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


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## Troy (31 Jul 2002)

*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.


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## Dogbert (31 Jul 2002)

*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.


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## Troy (31 Jul 2002)

*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.


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## The Virus (1 Aug 2002)

*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


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## shaggy (1 Aug 2002)

*Hib WPB*

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


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## Troy (1 Aug 2002)

*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.


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## Ruby (1 Aug 2002)

*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.


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## aardvark (3 Aug 2002)

*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!


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## Troy (25 Aug 2002)

*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).


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## Brendan Burgess (26 Aug 2002)

*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


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## Karen Mc Dougal (26 Aug 2002)

*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."


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## Karen Mc Dougal (26 Aug 2002)

*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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## Liam D Ferguson (26 Aug 2002)

*Re: With-Profit Roulette*

Hi Karen, 

Thanks for these pieces.  They're very interesting. 

I'm assuming they're articles from UK newspapers.  Do you have permission to copy them?  Otherwise, I think Askaboutmoney could be in trouble.  

Regards...Liam


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## Karen Mc (26 Aug 2002)

*Trouble*

Hi Liam,

Trouble from whom?

I do not have permission. The articles are from an Industry Journal that anyone can access.


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## ClubMan (26 Aug 2002)

*Re: With-Profit Roulette*

<!--EZCODE BOLD START-->* The articles are from an Industry Journal that anyone can access.*<!--EZCODE BOLD END-->

That may be so but some sites are a bit anal about content being copied and posted elsewhere and, in some cases, even links to content other than their home page being made. Ridiculous, I know but you need to refer to the terms and conditions of any particular site before copying extracts or linking. :rolleyes


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## Liam D Ferguson (26 Aug 2002)

*Re: Trouble*

Hi Karen, 

Can you post the name(s) of the journal(s) from which the articles were extracted?  

Thanks...Liam


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## Karen Mc (26 Aug 2002)

*Roulette*

Better delete the posts then. Could someone do the honours?


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## Rumpole (27 Aug 2002)

*Unbelievable Pedantry*

Please, no-one delete Karen's useful postings.

There is a wholly incredible pedantry about some of the Moderators' interpretation of copyright laws, on a power with Mithrandir's discourses on the meaning of advice.

To successfully pursue a copyright case would involve three steps:

1) Proof that it was indeed copy.  If the words are near enough the same then this stage would be fairly straightforward. I think that is where the aforementioned pedantic moderators (PMs) stop.  There are two further steps however in the legal process.

2) Who does one sue?  The Internet?  The service provider?  AAM?  The anonymous poster, Karen?  Our Founder?  

Worst case scenario is, of course, Our Founder.  Still one step to go.

3) What are the extent of the damages?  How many sales of Money Marketing were lost as a result of the postings?   

Really, PMs, think about it.  Is Money Marketing really going to sue Our Founder along these lines.  Get a grip or else divert your energies into counting how many angels can dance on the head of a pin.:rolleyes


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## Liam D Ferguson (27 Aug 2002)

*Go easy with the sarcasm*

As it happens, I agree.  Although Karen is infringing on the copyright of the publisher, I figured if we simply acknowledged the source of the piece, the publisher <!--EZCODE ITALIC START-->_ probably_<!--EZCODE ITALIC END--> wouldn't bother pursuing it.  

Hence my question above.  

It's easy to anonymously sit back and accuse a Moderator of pedantry, when you're at no risk whatsoever.  I'd rather be seen to be pedantic than run the risk of an equally pedantic publisher taking a pop at Brendan Burgess, as the recognised owner of this site.


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## rainyday (27 Aug 2002)

*Re: Unbelievable Pedantry*

Ok then Rumpole - Here's the alternative...

Can you come out behind your mask of anonymity and send Brendan your name, your address and a little note accepting personal responsibility for any damages & legal costs that could arise out of any such case, unlikely as it may be? 

Then I'll be happy to leave Karen's comments up.

Cheers - RainyDay


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## Sue (27 Aug 2002)

*Burgers*

No one told me Burgers make you fat! So I'm afraid I'm going to have to sue.

Sue


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## Tommy (27 Aug 2002)

*Relax folks, please...*

Hi everyone

Looks like I may be like the Cork subs yesterday, joining the fray after all the action is over. That said, I fear we're all getting a little carried away here. 

Firstly, after all, this is a non-profit making site - we cannot be accused of ripping off someone else's work for commercial gain.

Secondly, we're talking newspaper or periodical articles here - not exactly something that, in itself, has any potential to generate massive amounts of ongoing income for the copyright holder, so I don't know what concrete basis they would have for suing AAM or Brendan for anything other than token damages. 

Thirdly, Karen's postings were informative and interesting and IMHO should stay as they are until and unless we hear more. Remember, if we get continually get paranoid about alleged copyright breaches, then people will be less willing to post anything on AAM.

Fourthly, if anyone complains that their copyright is breached (by whatever post), then any of the moderators can remove a post within minutes.

Fifthly, why not let Brendan decide how to deal with the issue. Theoretically its Brendan who has ultimate responsiblity for any issues or problems (of whatever hue) caused by AAM so whatever he says on copyright should be the last word.

Sixthly, RainyDay, I would have thought that "a little note accepting personal responsibility for any damages & legal costs" would be totally unenforceable in law, 

Finally, this was a good thread before we started getting sidetracked. Let the (informed) debate continue...

That's my tuppence-worth, anyhow...

Tommy
www.mcgibney.com


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## rainyday (27 Aug 2002)

*would be totally unenforceable in law*

Hi Tommy - You're probably right in practice - However, I'd still be very interested to see if Rumpole feels strongly enough on this issue to come out of the closet & bear personal responsibility for the outcome?


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## Tommy (27 Aug 2002)

*Re: Relax folks, please...*

Hi RainyDay

does it really matter...really??

Tommy
www.mcgibney.com


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## rainyday (27 Aug 2002)

*Re: Does it really matter?*

Will I lose any sleep over it? No....

Is there an important principle here that could 'really matter' in the future? Yes...


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## Rumpole (28 Aug 2002)

*Total Indemnity*

No problem, <!--EZCODE ITALIC START-->_ Rainyday_<!--EZCODE ITALIC END-->.

My real name is Rupert Murdock c/o News International.

I hereby solemnly swear to indemnify our honourable Founder against any liability arising out of the repeating the content of articles of financial interest on AAM  ( I make an exception of the Examiner simply to deter publication of the self serving commentary of one of its well known Cork contributors).

BTW, <!--EZCODE ITALIC START-->_ Rainyday_<!--EZCODE ITALIC END-->, have you any views on the main substance of this thread as to whether there is or is not a "Black Hole" at Hibernian which should caution prospective investors from leaping into the seductive "win-win-never-lose" pretentions of Celebration Bond (or any other WPB for that matter) at this point of time?

As I understand the defence so far, it resembles the "shoot the messenger" attacks against our aforementioned Cork commentator.  Anyone who attacks WPBs is either mischievous, opportunistic or suffering from <!--EZCODE ITALIC START-->_ schadenfreude_<!--EZCODE ITALIC END-->.

Schadenwhat?? It means taking pleasure at the misery of others.  Is this not a clear admission that indeed WPB providers are in a miserable and parlous state.  I would suggest that prospective policyholders are somewhat indifferent as to the motivation driving those who are delivering the dire warnings.  The real issue for them is are these warnings justified.  What do <!--EZCODE ITALIC START-->_ you_<!--EZCODE ITALIC END--> think <!--EZCODE ITALIC START-->_ Rainyday_<!--EZCODE ITALIC END-->?  

(BTW if in expressing an opinion, <!--EZCODE ITALIC START-->_ Rainyday_<!--EZCODE ITALIC END-->, you in anyway incurr damages from those whom it might offend, I hereby extend the above indemnity to your good self).


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## Bedlam (28 Aug 2002)

*Canada Life With Profit Bond*

Canada Life have closed for the above.I wonder will any others follow ?


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## ciara (28 Aug 2002)

*Canada Life*

To clarify Bedlam's post
Canada Life have closed for lump sum investments into the With Profit fund.
It remains open for regular premium savings and pension business


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## rainyday (28 Aug 2002)

*Re: Canada Life With Profit Bond*

Hi Rumpole - I appreciate your good humour (genuinly). As it happens, I really don't feel that I can add any value to the original discussion on the 'black hole' issue.


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## Sean (30 Aug 2002)

*With Profit*

With Canada Life taking a lead on getting out .... any bets on how long it takes the rest to jump ship ?


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## DuBois (30 Aug 2002)

*Canada Life Press Release*

This is how CL announced their decision:
<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> "<!--EZCODE BOLD START-->* Canada Life Unitised With Profit Bond*<!--EZCODE BOLD END-->

Following a sustained period of poor equity market performance, it is inevitable that unitised with profit bonus rates will need to fall significantly from their current levels, unless there is a strong market rally.

In light of this, Canada Life is temporarily closing its Unitised With Profits Bond to new entrants.

Commenting on the change, Brenda Dunne, Appointed Actuary with Canada Life said 'As I indicated at the Society of Actuaries conference in April, strong equity market returns are required to support the current bonus rates in the market.  Since then, equity markets have fallen further, making bonus rate cuts inevitable for all providers.  Unless markets recover significantly before the next bonus declarations early in 2003, bonus rates will need to be 3% or lower. 

Pensions business will not be impacted to the same extent, due to the longer term nature of this business.  With Profit Bonds have provided policyholders with valuable guarantees, and have also insulated policyholders from the current volatility in equity markets.'
 -ends-
August 29, 2002"<hr></blockquote><!--EZCODE QUOTE END-->

As a Press Release, I presume its reproduction here on AAM is in keeping with the recent clarification by Brendan on copyright.

Anyway, more power to CL for having the courage to do what they see as right.  New business isn't everything.


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## Brendan Burgess (31 Aug 2002)

*Re: With Profit*

Hi DuBois

Thanks for posting this. As a press release, I assume that they want as much puclicity as possible.

I didn't see this in the newspapers anywhere. Maybe it's one for Niall Brady on Sunday

Brendan


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## Troy (31 Aug 2002)

*Winners and Losers*

Clearly With Profits is a very broad church.  So, CL can't hack it.  Hibernian and others are still strong enough to offer this product whose appeal to customers is stronger than ever.


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## Bedlam (1 Sep 2002)

*With Profit*

Troy
For how long do you think Hibernian and others can continue in this market given the current climate.
If as stated earlier Standars reserves are down from 10 billion to 1 billion.It must follow that Hibernian is in the same boat.They are cannot continue indefinitely along these lines.
It would appear to me that Canada have taken a very sensible approach on this occasion.


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## Troy (1 Sep 2002)

*Media Watch*

There is a truly staggering piece in today's Tribune.

CL are stating quite bluntly that new WPB customers are getting screwed by being suckered into a "Black Hole".  When exactly did this realisation dawn?  Markets have actually been improving for a month or so. Hence it is not as if the situation has now reached breaking point, that must have happened some time ago.  Is CL going to offer customers who have entered since they discovered the Black Hole their money back?

More outrageous is that CL's marketing manager says that all funds are in the same position and should close immediately.  There must be a law against this.  Grant Barrans has already stated that there is no such problem at Hibernian.  I trust that Hibernian will now issue a strongly worded Press Release rejecting these insinuations and assuring new customers that because of Hibernian's strong financial position they can fully expect a fair return on their investment.  There is no legacy of a "black hole" which will negatively impinge their bonus prospects.


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## S (2 Sep 2002)

*CL*

Financial strength of provider?

S


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## Bedlam (2 Sep 2002)

*With Profit*

Troy
If I were Grant Barrans I would keep my mouth shut.Canada Life may not be far off the mark on this one


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## Quote (2 Sep 2002)

*Standard Life Reserves*

If the information provided by Karen is correct, why would Standard & Poors confirm its 'Triple A' financial strenght rating for Standard only as recently as 07/06/2002 ?

www.standardandpoors.com/...96606.html


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## Jasper (2 Sep 2002)

*S&P rating*

Quote,

Very interesting. Do you have a link to Canada Life last review by S & P?


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## Quote (2 Sep 2002)

*S&P*

Having trouble with links but here are a few excerpts

 TORONTO (Standard & Poor's) Feb. 6, 2002--Standard & Poor's today revised to negative from stable its outlook on Canada Life Assurance Co. At the same time, the ratings on Canada Life and its U.S. subsidiaries, including the double-'A' counterparty credit and financial strength ratings on Canada Life, were affirmed. 


Standard & Poor's Rating Services said today it revised its outlook on the operating entities of the Aviva (formerly CGNU) insurance group to negative from stable. At the same time, the outlook on the group's U.K.-based holding company, Aviva PLC, was revised to negative from stable. The rating action follows Standard & Poor's revision of its outlook for the U.K. life sector to negative from stable (see the media release entitled "U.K. Life Insurance Sector Outlook Revised to Negative as Capital Market Volatility Persists", published on July 25, 2002, on RatingsDirect, Standard & Poor's Web-based credit analysis system).


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## CL person (2 Sep 2002)

*Ironic or what?*

So Canada Life's outlook is downgraded only because of Hibernian's parent's problems?


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## raul (4 Sep 2002)

*rating agencies*

Given their performance in recent years,I don't think anyone should place any great credence on their ratings.The list of the countries and companies which have defaulted having been quite highly rated is as long as your arm.

If the agencies were in any other business (& there was more competition in that business),S&P and Moodys would have been put out of business after the Asian crisis of '98. 

The recent situation where Japan's sovereign debt was rated the same as that of Botswana( to which Japan gives significant aid) says it all for me.

On the matter of the Canada Life move,time will tell.My own belief is that in more normal market environments there is little or no cross-subsidisation & all that is involved is smoothing.

However at a time when there are clearly massive deficits,it is to say the least unwise to invest in these funds.It may turn out that a wall of litigation will result from the whole thing & that providers who keep taking in money are sitting ducks for the legal eagles.


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## Quote (6 Sep 2002)

*Solvency*

[broken link removed]

Is it possible to tell from the above who will sink and who will swim taking into consideration that the figures are to the end of 2001.


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## Troy (6 Sep 2002)

*Solvency*

Good link Quote.  G2 would seem to be the key ratio.  On the face of it they nearly all look in trouble in so far as equity markets have fallen by way more that their Free Asset Ratios at the start of the year.  However, the regulators keep changing the rules on how the liabilities are valued so it is not quite that simple.

Certainly Canada Life at 3.3% were at the very low end of the range, so not surprising to see them crack first.


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## Quote (6 Sep 2002)

*Shifting the Goal Posts*

Troy,

[broken link removed]


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## Paster (13 Sep 2002)

*The Game is surely up*

Today's Irish Times provides another instalment in this saga.  

The startling new evidence is that they are all running for cover. Hibernian exposure to equities down to 46%.  Friends First down to 39%.  Scot Prov down to 40%. etc. etc.

Let's get real here, Bonds/Cash yield at very best 5%.  Knock off charges and that's a bonus support level of about 3%.  Throw in the equity "Black Hole" and the prospects for bonuses are grim indeed.  

What's worse, by being out of equities even a stockmarket rebound will not close the BH.  In effect solvency fears are driving these companies to resign themselves to the BH.

Yes, of course, Bonus rates are only going to come down about 1% next year.  This is still more deception.  The sustainable bonus rate next year is NIL but we must preserve the appearances of an orderly adjustment (except don't dare abuse this deception, you will be slapped with an MVA).

This product is way past its sell by date.  Talk that this is suitable for cautious investors is baloney.  How can intermediaries continue to sell this? (I think I know   ).  How can companies claim it is as valid an offering as ever?  Why doesn't the Regulator intervene and force them to follow CL's example?


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## Southren View (13 Sep 2002)

*A Balanced View*

I thought today's article in the Examiner was the most balanced so far in this, by now tedious, debate.

We are rightly drawn attention to the commercial self interests of those who are criticising WPBs.

I thought the best quote was as follows:<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> "Mark with profit funds down as low risk, low return investments, whose smoothing provides the ideal environment for cautious income withdrawals to support lifestyle and you won't be disappointed."<hr></blockquote><!--EZCODE QUOTE END-->Whilst every other journo is jumping on the bandwagan of this latest witchhunt it is good to see the greatest of them all take the contrasting line.  Brokers should be grateful for this support from an unlikely source.


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## Brendan Burgess (14 Sep 2002)

*Re: The Game is surely up*

<!--EZCODE ITALIC START-->_ As Southren View thought so highly of this article I have got the author's permission to reproduce it in full. _<!--EZCODE ITALIC END-->

British media attention on With Profit funds is beginning to spill into Irish newspapers, and with billions at play, the debate aroused is no harm. But it’s important to separate important points from commercial agenda’s, especially when firms that lack the financial strength to compete in the sector, take a hand. With-profit funds invest in a diversified mix of assets including equities, fixed interest securities, property and cash.  Much like any mixed fund the idea is to deliver competitive investment performance over the long-term.  But there is one major difference.  Actuarial science is used to give a smoothed return, ironing out the spikes and falls that naturally occur in asset values, to give a stable return.  Critics of with-profits, quite correctly, point out that the arcane mixture of asset movements on the one hand and actuarial judgement calls on the other makes independent measurement impossible. 

The ability of a life office to stretch its smoothing longer than others, covering the hole created during the current bear market, is ultimately a function of its financial strength.  But measuring the strength of a life office is a difficult task, testing even credit rating agencies. This has largely to do with differences in how future liabilities are measured. Ultimately, the only person in a position to report on the precise position is the fund manager- hardly an independent source. Criticism of marketing and transparency is valid, but uninformed if it fails to recognise the intrinsic value of smoothed funds in financial planning, especially for retired investors seeking careful withdrawals to support lifestyle.

But, unhappily, unsustainable double digit yields on maturing policies sold during the 1970’s and 80’s has formed the centrepiece of marketing campaigns, painting with profit funds as some form of gravity defying equity based investment. In the Republic of Ireland alone over €1 billion poured in last year, a pattern repeated in the UK where over £15 billion was invested.

The success of a with-profit fund is not just a function of managing the underlying assets, but getting the smoothing right.  Those with a commercial interest in criticising the with-profit sector focus on the likely shape of future smoothing, particularly when high annual bonuses are added despite large falls in underlying asset values. Postulations appear to be based on whatever assumed future asset growth helps the argument. But such analysis isn’t precise also because of the lack of disclosure characteristic of with-profit funds. Some funds, to protect long-term from short-term investors apply Market Value Reducers, as an early exit penalty.  But the scale of MVR being applied may be an indication of the depth of falls in underlying asset values, exacerbated in one case by extra generous first year bonuses.

Still, in other cases, no MVR’s are currently applied. Standard Life whose  AAA rating was recently renewed, and despite declines in its free asset ratio, has resolutely refused to apply MVR’s. But this is no guarantee that, in the face of any further stock market declines, MVR’s will not emerge at Europe’s largest mutual.  Meanwhile, Eagle Star in Ireland, whose with-profit fund contains 60% in fixed interest securities, is also riding out the current bear market free of MVR’s.  Last week Canada Life, a major player, announced the closure of its with-profit fund to new investment, reckoning that new investors would end up subsidising existing investors.  But closing with-profit funds is not unexpected in bear markets, and shouldn’t be misinterpreted. Others may follow. 

 So, in the heat of debate how do you separate good from bad analysis. Firstly, ignore any scaremongering about solvency. Insolvency, a failure by a life office to meet with-profit guarantees, would require the loss of all free assets and a plummet through other thresholds including the required minimum margin, resilience reserves and further safety features built into the calculation of liabilities.  Instead, expect (a) more with-profit funds to close for new business, (b) downward smoothing of bonus rates, and (c) reforms in the way in which information is provided. Ideally, investors should be have access to reports on the underlying fund value, its smoothed value and policy, its charges, and the cost of meeting guarantees.

When held over the long-term to maturity, with-profit investors should, reasonably experience returns in the range 2% to 4% above inflation. But it would be unwise to expect historic yields to be replicated. Maturing pension investments this year are recording yields over ten years ranging 9.5% to over 14% p.a., with similar yields for 15-year maturities.  Longer term yields are higher, ranging from just under 13% p.a. to over 15% p.a. for 20-year maturities during which smoothing occurred during bear markets such as October 1987 and the Gulf War. Mark with-profit funds down as low risk, low return investments, whose smoothing provides the ideal environment for cautious income withdrawals to support lifestyle and you won’t be disappointed.  But, expect with-profit funds to be an alternative to racy equity funds is a bit like expecting to win at the RDS, show jumping, on a camel.

Eddie Hobbs is a financial and management consultant, FDM, Summerhill House, The Curragh, Co. Kildare.  Tel (045) 442051.  E-mail ehobbs@indigo.ie.


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## Paster (15 Sep 2002)

*Eddie's Analogies*

Eddie is always good for an analogy.  In the Examiner piece it is Camels and Showjumpers.  

But a better one is in today's SBP where EH compares a WPB to a Tractor whilst a unit linked equity fund is like a Ferrari.

Let us stretch that one out a bit.  Anybody getting on a Tractor two years ago is still limping along, albeit all four wheels are punctured,  they will arrive at their destination though in a much slower time than they were promised.  The Ferraris on the other hand have all gone crashing spectacularly into the gravel pit and would dearly wish they had got on a Tractor in the first place.

But here is the main point.  Anyone considering investing today has a choice of a brand new Ferrari but there are no brand new Tractors, the only Tractors available are punctured in all four wheels.  These are not suitable for anyone, except for the poor punters already on board for whom the pain in jumping off is probably worse than limping along to the finish!!

There are of course other modes of transport, not quite so exciting as a Ferrari but at least brand new and not chronically damaged.


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## Gus (16 Sep 2002)

*Article*

The theme appears to be that these funds can evade falls in values, which is incorrect. Paster is right. All funds have taken a hammering, but who said that in a prolonged depressed market With Profit investors aren't expected to feel pain too? They just get it in the neck later. The Examiner article was reasonably balanced from that view.


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## Unregistered (16 Sep 2002)

*Eddie Rockets Return*

How Eddie gets a projected with profit return of 2%-4% above inflation when over 60% of the with profit funds are invested in bonds is beyond me ?


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## Gus (16 Sep 2002)

*Returns*

At current European inflation it works out at 4% to 6%. Irish inflation is higher today, but can't continue without messing up the economy. At 4% it works out at 6% to 8%. Perhaps the bonds are Government and investment grade Coroporate bonds? I do know that the Eagle Star average dividend less costs has been 8% since 1979, but it's fallen this year to 6.5%. Under normal market conditions over the long term 2% real plus a percent or two doesn't appear unreasonable?


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## Curious (18 Sep 2002)

*WP*

Certainly cash holdings in WP funds are at record levels. Long term, and people seem to forget these are long term investments, the average equity content can be expected to be in the range of 50% to 70%. 

Too much emphasis is on this 3 year negative return period we are going through. If you are invested for 15 to 20 years this is a blip, agreed a serious blip but a blip all the same. Long term returns is the target. The benchmark will be Managed Fund returns which WP funds have consistently outperformed in the past. Eddie Hobbs may be the best to confirm this from his last Irish Times survey. For this reason the historical information available to him would indicate that his premise that WP are low risk low return is questionable.

Irrespective, it was nice to see a measured and reasoned debate on this subject. It has been all to lacking in the past.


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## Dogbert (20 Sep 2002)

*Very Curious*

Hi Curious,

What your basis for expecting with-profit funds to outperform managed funds in the future, given that (a) they invest in (essentially) the same set of assets, and (b) with-profit funds charge more to pay for their smoothing and guarantees ?


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## Curious (20 Sep 2002)

*WP*

Dogbert
I'm simply using historical data from recent Irish Times Personal Pension surveys compiled by Eddie Hobbs.


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## Karen Mc Dougal (24 Sep 2002)

*Quinn Life Mail Shot*

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> British media attention on With Profit funds is beginning to spill into Irish
                           newspapers, and with billions at play, the debate aroused is no harm. But
                           it’s important to separate important points from commercial agenda’s,
                           especially when firms that lack the financial strength to compete in the
                           sector, take a hand. <hr></blockquote><!--EZCODE QUOTE END-->

The following is one of the questions that Gary Mahood recommends that the self-employed ask their financial advisor before making a cotribution towards their pension this year 

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> Are you investing your pension funds in the "black hole" that is now reportedly emerging in the with-profits business as discussed recently in the financial press? If you are, what does your Financial Advisor suggest that you now do?<hr></blockquote><!--EZCODE QUOTE END--> 

The other questions relate to commissions, charges, performance and attitude to risk and I think these have been debated at length on AAM.

<!--EZCODE BOLD START-->* THE TWIST*<!--EZCODE BOLD END-->

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> Your adviser may be reluctant to suggest that you invest with Quinn Life because we do not use your money to pay any commissions or fees.<!--EZCODE BOLD START-->* However, you could agree a fixed fee with your adviser to review the Quinn Life pension options*<!--EZCODE BOLD END--> <hr></blockquote><!--EZCODE QUOTE END-->


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## BEDLAM (26 Sep 2002)

*Standard Life*

It would seem, according to the Irish Times that if the above are forced to apply an mva it will have been as a result of media coverage of the with profit debate over recent times and punters jumping ship as a result.
The Standard Life must have taken on some of the spin doctors that our politicans are so good at using to get bad news into the public domain.
The application of an mva will have nothing to do with current markets or the fact that they are heavily invested in equities.
Any comment/view from our Broker contributors, who have in the main been very quiet on this topic


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## Sir Galahad (26 Sep 2002)

*MVR's*

Hiya Beddie,

MVR's will be applied by SL if the Bear gets bigger and longer, but will be applied sooner if media rumour whipped up by competitive forces with lower FAR, and journo's stuck for a story gathers. But if we pull out of the bear within six month's I guess it may have ridden it out.

But if an MVR goes on, so what - its part of the deal. It won't affect long term investors, and those withdrawing 'income' regularly pitched at the bonus rate will be fine too. I don't understand the 'calamity' if the fund goes MVR like most everybody else. Why aren't SL beibf praised for not doing so, so far. Guess that wouldn't sell a story to an editor.


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## S (26 Sep 2002)

*MVA*

I've no problems with MVAs at all. I don't see them in a negative aspect. You cant really say you have financial clout and be first on the market to impose one.

S


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## Karen Mc Dougal (26 Sep 2002)

*Standard Life*

Standard Life lashes out at Cazalet claims
John Stones

Standard Life has launched a scathing attack on influential
analyst Ned Cazalet, saying that he has refused to accept
invitations to go through its books and that his analysis is
wrong. 
Cazalet angrily rejects the claims, saying he has had repeated
meetings with senior Standard figures this year, including group
finance director John Hylands and group actuary Bob King and
that the company, by its own admission, lost £9bn in reserves
last year. 
Standard claims other analysts are more credible than Cazalet
and that he is trying to promote his business by attacking the
country's biggest mutual. 
The row follows well-publicised comments by Cazalet
questioning Standard Life's strategy, its policy on bonuses and
market value adjusters and claims that its reserves have fallen
to below £2bn. 
Standard Life has reasserted its financial strength, saying it
can withstand the FTSE falling to 3,000 before having to
switch assets. But it refuses to disclose the current valuation
of its reserves or its with-profits policyholders bonus policy,
repeating that bonuses and MVA policy are under daily review. 
Director of corporate affairs Gordon Arthur says: "We are one
of the five strongest life companies in the world and have an
AAA rating from Standard & Poor's and Moody's. They do not
just sit behind a desk looking at published FSA returns but look
at our books, our management process and our long-term
strategy. 
"Cazalet has refused to come and meet Standard Life because
he is too busy. We struggled to get a date out of him and then
he cancelled. The FTSE can go down to 3,000 before we have
to switch assets." 
Cazalet says he will take the fight to Standard Life. He says:
"It is completely untrue that I have refused to meet Standard
Life. I have had a face-to-face meeting recently with senior
figures in Standard Life."

Source : MoneyMarketing


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