Current Economic Conditions
With all of the recent speculation about the ‘global credit crunch', it is significant that according to risk rating agency Fitch, the exposure of UK Life Offices to the US sub-prime market is minimal. Under FSA regulations, assets that back endowment guarantees have to be ‘admissible' and this would not include sub-prime assets. This means that any Life Offices that do hold sub-prime assets would account for them within their fund's surplus rather than in the core assets that make up their policies' asset values. The conclusion we can draw from this is that UK Life Offices are unlikely to be directly affected by the sub-prime issues.
The other concern for many is the ongoing volatility in world equity markets. With-profits funds provide insulation to investors from this volatility. Endowment policies are long term investments that use smoothing to provide insulation from short term market fluctuations.
With-profits funds, despite their size, are actively managed and we saw a number of examples through the year of fund managers repositioning their funds to take into account changing conditions. For example, Prudential moved £5 billion out of UK commercial property and Legal & General moved 10% of its £30 billion fund out of equity and property and into bonds.
The ‘investment lag' created by with-profits smoothing means that bonus rates for the stronger offices should continue to rise even if equity and property returns remain poor for some time. This provides a real prospect of increasing returns over the coming years.
Nothing contained within this document constitutes investment advice or an offer to subscribe . If in doubt, please talk to your financial adviser.