How To Do It: With-profits plans are not for all

Many Gulf-based expatriates will know about with-profits savings plans that are usually managed by insurance companies. Their apparent aims are to provide clients means to accumulate money for retirement and to pay off their mortgages.

Never forget they also provide many financial advisers with welcome commissions and help the bottom lines of all those finance companies extolling their virtues.

With the continuing uncertainty and volatility in the global equity markets, allied with record low interest rates, these are not good times for the individual investor. There are those who would say that with-profits plans fill the gap between investing in stock markets and leaving one's money in the bank.

Indeed, it can be regarded as a long-term savings plan comprising equity, fixed-interest investments and some property.

What should be an ideal investment vehicle for many seems to have lost direction and has become mired in controversy. There is no doubt that many have been mis-sold with the average policyholder having little idea what they were purchasing and those selling the policies failing to explain the possible downside and risk.

It is impossible to formulate a figure of how much has been invested from these shores but in the UK the total has been put at well over Dh2,000 billion.

Recent Financial Services Authority (FSA) proposals emanating from there will force this investment sector to put its house in order or face the consequences. If they go ahead, it can only help the individual investor in making the right investment choice and should be welcome news.

Much of the criticism levelled against the with-profits industry is justified. There are some who would argue that they take the form of a tracker fund but the charges associated with them are on the very high side, and guess who has to pay?

In the past, information, on how much money has been made by the fund or the way in which bonuses have been ascertained by fund managers, had been patchy or, in some cases, non-existent. There does appear to be insufficient safeguards to protect policyholders who may not have received their fair share.

Unfortunately, many investors are naive and ignorant, and this has resulted in them having no idea that they are buying into an investment that is risky and is subject to the vagaries of equity markets.

The end result has seen millions of savers facing a future of diminishing returns which will not pay off those mortgages (which they were meant to) or have left a hole in expected pension payouts. Readers only have to recall the Equitable Life debacle to see the dire consequences.

There is no doubt that an overhaul is long overdue and, although better late than never, investors have had to wait a long time to know whether they have been treated equitably. The new proposals will ensure that the strength of the company providing the policy is known by all and the small print is made a little larger for all to read and comprehend. Investors will be told of all potential risks, rewards and charges in simple English.

The FSA proposals will require companies to keep their clients informed throughout the life of the investment and that annual statements issued to policyholders will include:

* the cash-in value (how much would be received now if the policy were to be encashed)

* the value on death

* how much would be expected if the policy were to continue until maturity

* the asset share (the underlying value of the holder's share of the fund).

A radical new proposal is the creation of a new policyholders' advocate who would represent members when inherited estates are being discussed and would be involved in all stages of negotiations. His role would be to get the best deal possible for the customers.

In future, companies will have to indicate their exact liabilities showing costs associated with the benefits savers have built up in addition to what they have guaranteed to policyholders.

Another proposal is that insurers that are quoted on the stock exchange will have to disclose how they carve up their orphan assets between shareholders or policyholders. This relates to money made in previous years that has yet to be distributed.

Despite these new welcome proposals, there are those of us who think that not only have they come too late but also they fall short of what the average investor really needs.

With-profits plans are still too difficult to comprehend, lack flexibility and, for the poor investors, are still too expensive. The risk-averse investor, who wants a foot in equity markets, deserves more protection and some better vehicle to drive.