UK with-profits funds are at a critical juncture after recent regulatory and Government interventions, according to a leading consultant.
Trevor Fannin, leader of Towers Watson’s UK with-profits services, said that the recent Financial Conduct Authority (FCA) clarification of the future of mutual capital and last month’s Budget announcement about increasing pensioners’ investment flexibility at retirement had both provided a potential long-term opportunity for the life insurance industry.
But he cautioned that factors such as the latest Solvency II capital requirements and the threat of a wide-ranging review of the fairness with which insurers have treated customers when selling policies in the past were lurking issues for with-profits funds.
Trevor Fannin said: “The FCA proposals for mutual capital in Policy Statement 14/5 seem a pragmatic way forward but, despite the lifeline it has thrown them, the remaining mutuals need to be thinking about their overall strategy. They still need to demonstrate a convincing and robust business case for continuing to write new business as opposed to run-off.”
George Osborne’s Budget statement about giving people more control over their defined contribution pension pots was also a potential boon for the sector, he said. “Consumers may be looking to invest their hard-earned pensions savings in portfolios that balance yield and capital growth with low downside risk. Life and pensions providers with a track record in providing liability-driven solutions may have an advantage, with perhaps an increased role for with-profits-like products in the retirement income market.”
On Solvency II, he pointed to the potentially significant impact that the 1 January 2016 implementation date could have on the operations and financials of a number of with-profits funds. A recent poll conducted among with-profits actuaries by Towers Watson showed that the majority of firms expect the latest capital specifications in the Directive to require them to revisit the way they are managing their fund.
According to Fannin, insurance companies will also have one eye on what may materialise from the proposed investigation of the fair treatment of long-standing life insurance customers.
All the changes are occurring at a time when with-profits business has become less of a strategic focus for many firms. Trevor Fannin commented: “With over £300 billion invested in with-profits, the overall management of these funds is critical to long-term savers and we are continuing to work with a large number of funds in respect of rising to these challenges.”
Among the actions he expects insurers to be taking are revisiting their in-force with-profits business to ensure it is providing value for money for customers, possibly involving options such as migration to alternative products or simplifying existing product structures.
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