With-profits funds explained Asset allocations and closed funds
What are closed funds?
Many with-profits funds are closed to new business, typically because the fund is struggling to attract new customers or because it's been taken over by another company.
Closed funds can work for or against the individual investor. If the insurer has a large remaining fund and a declining number of policyholders, it may use this surplus cash to pay increased bonuses to policyholders.
However, many closed funds invest predominantly in fixed-interest investments, rather than equities. Scottish Life's closed fund, for example, had 54% of its assets invested in equities in 2000. By 2009 this had dropped to just 12%.
Asset allocations
The table below shows how the percentage of with-profits funds invested in equities changed between 2000 and early 2009. All figures are representative (ie sampled from across the insurance company's with-profits fund) and may not apply specifically to your individual policy. Asset mixes can change dramatically within a short space of time for individual products.
| Equity weightings in with-profits funds | |||
|---|---|---|---|
| Provider | 2000 | 2009 | Decrease 2000-09 (% points) |
| Friends Provident | 59% | 8% | 51 |
| Standard Life (aggregate) | 77% | 27% | 50 |
| Zurich (90:10 Fund) | 68% | 20% | 48 |
| Scottish Life Closed Fund | 54% | 12% | 42 |
| Zurich (100:0 Fund) | 68% | 26% | 42 |
| CGNU Life/CULACa | 74% | 38% | 36 |
| Scottish Friendly | 62% | 27% | 35 |
| Liverpool Victoria FS | 80% | 51% | 29 |
| Royal London | 71% | 42% | 29 |
| Axa Sun Life | 83% | 56% | 27 |
| CIS (aggregate) | 65% | 38% | 27 |
| Legal & General | 67% | 41% | 26 |
| Norwich Union L&Pa | 68% | 42% | 26 |
| Prudential | 72% | 50% | 22 |
Table notes
- Managed by Aviva
'Aggregate' values are an average of different asset mixes that vary by product type, and as such should not be taken as applying to any particular with-profits contract.
Information sourced from Cazalet-Consulting
Why asset allocations matter
The shift out of equities can in part be explained by a change in the regulations in 2004, which forced insurers to hold a higher level of fixed-interest investment in their with-profits funds. So, in 2000, with-profits funds held an average of 69% of their assets in equities and 21% in bonds. By 2009, this had reversed, with just 28% in equities and 59% in bonds.
In the case of closed funds, there's also little incentive for the fund manager to chase higher returns. Where the funds have enough money to pay the bonuses they've already promised, insurers have a clear motivation to protect the money in the fund by investing in lower-risk assets. This may suit those who are close to maturity, but may leave longer-term investors locked in to a fund that's producing mediocre returns.
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