Policyholders in these “zombie” funds were led to expect improved performance when firms such as Resolution and Pearl started to snap them up in 2004.
However, new evidence reveals they have failed to turn the schemes round. Investors in policies that are now owned by these firms missed out on returns of up to £2.7 billion in 2005 because they lagged open funds and other closed schemes, according to AKG, a consultancy.
Hundreds of thousands of people are unable to get out of these plans because firms charge penalties of up to 20 per cent, despite calls for the Financial Services Authority (FSA), the City regulator, to abolish the fines. Liberal Democrat Vince Cable said: “City institutions have managed to trap millions in underperforming funds. The FSA should be looking at this more seriously.”
The scale of the scandal is astonishing: savers have a total of £95 billion tied up in closed with-profits funds via endowments, bonds and pensions. Another £332 billion is in funds that are still open for business.
Clive Cowdery, who set up Resolution, has bought an estimated £42 billion of closed with-profits funds. Rival entrepreneur Hugh Osmond, who owns Pearl, has another £15 billion. Together they are responsible for 12m policies — one for every five people.
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They claimed they would boost returns but AKG said they had not turned things round. In 2005, the funds of closed-fund consolidators produced average returns of 11.3 per cent against 14.2 per cent for other closed funds and 16.1 per cent for schemes still open for business. The FTSE 100 rose 17 per cent.
A saver who cashed in a 25-year endowment after 20 years, into which they had saved £50 a month, would get an average of £20,880 from closed funds in the hands of consolidators, compared with £22,467 from other closed funds and £23,601 from open funds — a difference of up to £2,721. Research also shows their performance relative to open funds and other closed schemes has deteriorated in the past two years.
With-profits policies, which invest in a mixture of equities, bonds and cash, were widely sold in the 1980s and 1990s as a “safe” way of getting exposure to the stock market, but were hit by the crash of 2000.
Many policyholders have challenged exit penalties via the Financial Ombudsman Service, winning back thousands of pounds, but industry experts want further action. Mark Davies of FS Complaints Handling, who has helped thousands win compensation in return for a fee, said: “If the FSA doesn’t sort this out, we’ll form an action group and go down the judicial-review route.”
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Pearl claims its performance will improve by 2007-8. It said: “These ‘oil tankers’ take a long time to turn round. The current owners only acquired the businesses last year and in that time have taken significant steps to improve policyholder returns. The proportion of Pearl funds in equities and property has increased from 25 per cent to 50 per cent.”
Ian Maidens, chief actuary of Resolution, said: “There is a limit to how much any owner can do; you inherit what you inherit. We have funds at both the top and bottom of the tables.”
Here we highlight the questions you should be asking.
What sort of policy do I have?
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Firms such as Resolution and Pearl have taken over many closed funds in recent years and changed the names, making it difficult to keep track.
Resolution took over Royal & Sun Alliance’s closed-life business in 2004 and merged with Britannic in 2005. It acquired Scottish Provident and Mutual in September.
See our table, left, to work out who owns your policy.
Does the policy still meet my needs?
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It is unlikely. Millions of endowments taken out alongside mortgages are not on track to clear the loans, while many pensions and endowments are performing little better than savings accounts.
Justin Modray of Bestinvest, an adviser, said: “Shorter-term investors may earn more in a savings account while longer-term investors may do better with a conventional investment portfolio.”
The problem is the switching cost is high and depends on how long you have had the policy.
How long have I had the policy and how long is left?
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The maturity date of your endowment should be on your valuation statement. The longer you have held the policy, the lower the penalty for quitting is likely to be.
Pensions will have a nominated retirement date, usually 60 or 65, and with-profits bonds run until you decide to sell.
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What can I expect my policy to be worth if I keep it until it matures?
You can receive a projected maturity value from your with-profits firm. These assume growth rates of 4 per cent, 6 per cent and 8 per cent for life policies and 5 per cent, 7 per cent and 9 per cent for pensions. The maturity figure should also include your final bonus, which historically makes up 30 per cent of your total payout, although these have fallen as low as zero.
Advisers say the growth rates used are far too high for closed funds, which now have big holdings in low-return bonds rather than equities.
An adviser should be able to help you work out a more realistic maturity value based on the underlying assets in your fund.
What could I get if I cashed in my policy today?
If you want to get out before the maturity date, you may well get less than you have contributed because of exit penalties.
If you cash in a with-profits bond within the first five years, there is usually a surrender penalty of up to 5 per cent. You may also be charged a market value reduction or market value adjuster if the underlying with-profits fund has delivered poor returns.
What benefits does my policy have?
It is essential to find this out before you decide to quit. Many pension policies include valuable guaranteed annuity rates which could boost your retirement income. Your endowment may include life cover, although you should be able to arrange this at much lower cost elsewhere.
Can I complain?
Yes, if you feel that the risks of your with-profits policy, or the chance that you would be charged a penalty, were not fully explained.
Complain first to the firm and then to the Financial Ombudsman Service on 0845 080 1800.
I’M DUMPING MY POOR PERFORMERS FOR A SIPP
John Slator, 63, and his wife, Christine, 60, from West Sussex are in the process of dumping their NPI with-profits fund because of its poor returns.
The fund, which was closed in 2003, is now owned by Pearl. John, who was a director of a building firm until his retirement in 1997, was on the board of pension trustees and chose to go with NPI because he believed the group had a good reputation.
He said: “The first year or two wasn’t bad. We were getting a good return from what we felt was a relatively safe investment.”
The performance has deteriorated sharply since the 2002-3 bear market, though. John has been taking the maximum out of his drawdown pension because of its poor performance, and is in the process of transferring to a Standard Life self-invested personal pension (Sipp) on the recommendation of his financial adviser.
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If you are trapped in a closed fund, or have had any other problem with your policy, please tell us at timesonline.co.uk/moneyweblog
For fund prices visit www.timesonline.co.uk/funds