April 2012

With-profits performance: you're better off with a mutual

 

Mutual Insurers once again dominate the Money Management tables for with-profits returns, with returns over 25 years 27.5% higher than for non-mutual insurers, and easily beating alternative typical investments too.

When FSA published its policy statement PS12/03 (Protecting with-profits policyholders) in March, it recognised - not before time - that a with-profits fund in a member-owned mutual is inherently different to that in a shareholder-owned insurer. As the latest research published by Money Management ¹ shows, this difference extends to the size of payout a policyholder can expect when they cash their policy in.

The survey collects data from providers and/ or FSA returns, and assumes a policy taken out for £50 per month. Over 25 years, the average mutual payout was £42,299, 27.5% more than the average for non-mutual firms (of £33,184). The average mutual payout was also comfortably more than comparative products:

• 18% more than the average mixed (40-85%) fund
• 14% more than the UK all companies fund; and
• 60% more than the average 90 day notice deposit account.

As the chart below shows, it hasn’t always been the case that mutuals outperformed shareholder owned companies.

Source: Money Management, April 2012 (and previous years)

Until 2000 non-mutuals outperformed the mutual sector - though it should be pointed out that during the period up to 2000 many of our current shareholder-owned companies demutualised. 

————————————————

¹ All data is sourced from Money Management. Data excludes Phoenix Assurance whose with-profits policies have been subject to significant overpayments of excess surplus in recent years.

 

Since 2000 we have been in a low-inflation, low interest economy, and with a number of periods of falling equity markets, with-profits policies have become far more conservatively managed. 

At the end of 2011 for example, the average with-profits policy contained a third in equities and over 40% in fixed interest - a very different position from the start of the millennium, where most funds were heavily biased towards equities, until many providers were forced to sell shares during the 2002/3 recession. 

 

Source: Money Management, April 2012 (and previous years) 

As a result returns are lower than the extremely high payouts of the late 1990s, though as the second chart shows total returns have stabilised in recent years. Indeed, given the variability of the stock market since 2008, this demonstrates one of the abiding virtues of with-profits - that returns are smoothed over time. And as stated earlier, if the investment is made with a mutual, the total return will beat the average mixed fund, which is where a typical ISA will invest, and which will have experienced a similar trend in long-term payouts.

Over ten years the situation is similar, with mutual with-profits policies paying out an average of £7,151, around 12% more than non-mutuals. This is an increase in the average payment for 2011 (of (£7,040), even though the stock market performed erratically in 2011. This is partly explained because the stock market and property markets were also in recession ten years ago.

A customer purchasing a with-profits policyholder with a non-mutual in 2002 and paying in £50 a month over ten years would see a net return of just £390 above the £6,000 paid in. This compares with £1,151 with a mutual, and is less than the £475 they would have received from the average 90-day account with a building society. 

So the important lesson there is not to assume with-profits returns are generally poor - though they can be if the money is placed in organisations for whom shareholder returns are more important than policyholder returns. Mutual insurers - with no shareholders to satisfy provide an excellent investment return that outperforms comparable investments in the long-term.

 

 

 

 

 

< Back