I’m surprised by the apparent indifference in our media towards Phoenix Life Group’s Scheme of Arrangement proposed to over 50,000 with-profits pension policyholders earlier this week. In my opinion this Scheme has the potential to transform with-profits and to improve the financial prospects of millions of with-profits savers.
In my discussions with Phoenix over the last few weeks while I’ve been studying and analysing this Scheme in depth (see my website www.phoenix-scheme.com), I’ve learnt that other insurance companies are paying very close attention. If it’s successful, and due to the way the voting is structured it’s hard to imagine it won’t get a majority yes vote, I think we could see other with-profits funds with weak balance sheets following suit. The impact of this innovative and imaginative solution to the problem that Guaranteed Annuity Rates present to both insurance companies and policyholders alike could be huge.
Guaranteed Pension Rates are bad news for shareholders who have to tie up capital to meet these liabilities. But they are not entirely satisfactory for policyholders either, especially where policyholders are unable to meet all the policy conditions required to fully maximise their benefit. Even those policyholders who can meet the conditions often find the compromised options they have had to take to be inconvenient, and this is an inconvenience they will live with for the rest of their lives.
As a general rule, Guaranteed Annuity Rates are usually extremely inflexible and can require the policyholder to;
• Retire on the specified retirement date and not earlier or later
• Take a non-increasing pension offering no inflation protection
• Take a single life annuity that ceases on death even if they are married
• Not take a lump sum because the lump sum is not as valuable as the guarantee
In addition, many clients don’t really like traditional annuities and prefer drawdown or some form of investment linked annuity, but obviously don’t take this route on a plan with a Guaranteed Annuity Rate.
And due to cautious asset mixes required in order to meet the guarantees, and with high extra charges now applying to meet the guarantees, policyholders are likely to get just the guaranteed minimum and no more, and the effects of inflation of course erode the real value of the guarantee each year.
By getting a cash uplift in return for giving up the Guaranteed Pension Rate, all of these shackles disappear. While there’s a small chance of the pension at the policy retirement date being lower than the guaranteed value, there’s a high probability of a superior income PLUS you get to choose when you retire, whether it should increase, how you invest it (if you transfer), add a spouse’s pension at retirement, amalgamate with other plans to buy a pension income other than a traditional annuity etc.
In my opinion, that’s a really positive transformation in retirement prospects.
Importantly It also makes perfect sense to the insurance company too. While it aims to be “embedded value neutral”, it draws a line in the sand for when exposure to Guaranteed Pension Rates stop being a liability. And the greater exposure to real assets in the fund means that there is an asset mix with increased potential for future returns to them too.
Ultimately, improving the recovery prospects on one part of the with-profits fund should inevitably have positive effects on other policyholders in the fund too. It won’t rid with-profits of the cancerous effects of over generous guarantees overnight, but it just might be the first dose of the right medicine.
In my discussions with Phoenix over the last few weeks while I’ve been studying and analysing this Scheme in depth (see my website www.phoenix-scheme.com), I’ve learnt that other insurance companies are paying very close attention. If it’s successful, and due to the way the voting is structured it’s hard to imagine it won’t get a majority yes vote, I think we could see other with-profits funds with weak balance sheets following suit. The impact of this innovative and imaginative solution to the problem that Guaranteed Annuity Rates present to both insurance companies and policyholders alike could be huge.
Guaranteed Pension Rates are bad news for shareholders who have to tie up capital to meet these liabilities. But they are not entirely satisfactory for policyholders either, especially where policyholders are unable to meet all the policy conditions required to fully maximise their benefit. Even those policyholders who can meet the conditions often find the compromised options they have had to take to be inconvenient, and this is an inconvenience they will live with for the rest of their lives.
As a general rule, Guaranteed Annuity Rates are usually extremely inflexible and can require the policyholder to;
• Retire on the specified retirement date and not earlier or later
• Take a non-increasing pension offering no inflation protection
• Take a single life annuity that ceases on death even if they are married
• Not take a lump sum because the lump sum is not as valuable as the guarantee
In addition, many clients don’t really like traditional annuities and prefer drawdown or some form of investment linked annuity, but obviously don’t take this route on a plan with a Guaranteed Annuity Rate.
And due to cautious asset mixes required in order to meet the guarantees, and with high extra charges now applying to meet the guarantees, policyholders are likely to get just the guaranteed minimum and no more, and the effects of inflation of course erode the real value of the guarantee each year.
By getting a cash uplift in return for giving up the Guaranteed Pension Rate, all of these shackles disappear. While there’s a small chance of the pension at the policy retirement date being lower than the guaranteed value, there’s a high probability of a superior income PLUS you get to choose when you retire, whether it should increase, how you invest it (if you transfer), add a spouse’s pension at retirement, amalgamate with other plans to buy a pension income other than a traditional annuity etc.
In my opinion, that’s a really positive transformation in retirement prospects.
Importantly It also makes perfect sense to the insurance company too. While it aims to be “embedded value neutral”, it draws a line in the sand for when exposure to Guaranteed Pension Rates stop being a liability. And the greater exposure to real assets in the fund means that there is an asset mix with increased potential for future returns to them too.
Ultimately, improving the recovery prospects on one part of the with-profits fund should inevitably have positive effects on other policyholders in the fund too. It won’t rid with-profits of the cancerous effects of over generous guarantees overnight, but it just might be the first dose of the right medicine.
