Beware poor performance in closed life insurance businesses, says Teresa Hunter
As with the carousel, so with life, not least when it comes to investments. We are all alone, trapped in endless cycles, powerless to stop the music, with advisers waving from the sidelines.
Well, it seems the pensions merry-go-round is starting up again. Friends Life has acquired Axa Life funds incorporating both personal and occupational pension funds, while Aegon has sold the old Guardian Life business to private equity firm Cinven.
Guardian who? As Guardian closed to new business more than a decade ago, it is easy to forget it was once one of the UK’s top five insurers, particularly well-loved of advisers.
And what of the other great names trusted by generations of households, like the Royal Sun Alliance, Scottish Mutual and NPI?
Their customers are locked away in zombie funds, inhabiting a nowhere land of the living dead. Those great names were worse than useless when it came to offering value, security and superior returns to their long-term pensions customers, all of which they promised.
The advisers who sold those policies are long retired, even if those who bought them won’t ever be able to afford to be. The history of insurance is littered with broken promises. Pile them in, then sell them short, was certainly the slogan of the day.
People tell me closed funds can perform better than open ones. I can’t think of any. Most underperform. High commissions and charges, combined with wrongly set premiums, lock in poor performance.
On top of this, policyholders are insulted by shoddy service. There is no one they can speak to, and letters go unanswered.
All this activity came to a halt during the credit crunch, but the appetite for acquisition appears to be returning.
However it’s dressed up, the motivation behind these deals is to save money and increase profits for the acquirers. A guarantee of superior investment returns is unlikely to be written into any takeover documents. If the insurance fund merry-go-round is taking off again, advisers will find themselves in the firing line.
Many will feel like turning the air blue when they discover a proposal they worked hard to set up, has changed overnight, potentially destroying months of work.
Others, further down the cynicism spectrum, will chalk it up as an opportunity for a resale and further commission.
You will want to know if the fund is to be closed, or left open, and if so what new money will be going in. Without inflows, funds shrink, because the manager has to redeem investments to meet commitments. Returns suffer as a result, not least because the best and the brightest are not much interested in effectively managing a wind-up.
Who will be managing investments in future is another crucial question, as will any changes to charging or service structure? Finally, what will it cost to switch elsewhere or start all over again. These can be considerable for a group scheme.
Probably eight out of ten advisers will look seriously at moving any group scheme involved in radical restructuring. This might be for no reason other than as funds are merged and demerged over the years, tracking performance becomes a headache.
Meanwhile, anyone involved in setting up pensions today should consider a structure that will remain immune to the insurance fund merry-go-round. The value of a traditional big brand has gone. Sipps, platforms and other similar structures offer protection against the worst in the industry and look the more attractive way forward.
Teresa Hunter is a freelance journalist