Closed with-profits funds have ‘improved' - FSA

The FSA says the management of the £110bn closed-ended with-profits sector has generally improved since its last review in 2007, although there are still areas for concern.

Advisers have been calling for an improvement in the running of clients' money trapped  in the funds for years, with many arguing the performance of the products and policyholder communication does not compare favourably to open-ended vehicles.

However, with the exception of two firms, the FSA says providers' run-off plans for closed-ended with-profits funds (including coping with the additional risks of a declining asset portfolio and the distribution of any inherited estate) "adequately" set out their plans for the vehicles.

Most firms had considered the projected shape of the fund, although two firms
could not demonstrate they "fully understood the profile of all types of projected
outgoings".

It also highlights several firms were less prepared in terms of their strategy to assess the point in their run-off plan where the business becomes ‘sub-scale' and viewed this point as still being "very distant".

The regulator said with one exception, firms had adequate plans for how any surplus in the fund would be distributed in a way that ensured all classes and generations of with-profits policyholders are treated fairly

In running closed funds, firms were also able to demonstrate they regularly reviewed
the fund's investment strategy, making changes where appropriate to reflect the
changing circumstances of the fund. The regularity of review varied, with some
examining their strategy quarterly, others annually or tri-annually, the FSA found.

Firms also demonstrated they conducted a reasonable analysis of the liquidity
of investments in relation to potential liabilities.

The FSA says it is taking action with specific firms where it has identified weaknesses and it will require them to take corrective action in an appropriate time period.

"However, in general, with the exception of the issues set out above we have not
identified any clear weaknesses in the general operation of with-profits funds that
are a common feature of closed funds although a number of issues could become
more acute in closed funds such as charges and post sale communications," it says.

The regulator intends to strengthen the quality of reporting to
policyholders and prevent escalation of risk in the future across all with-profits funds, including closed-ended vehicles.

Closed funds represent a significant amount of the with-profits sector holding
approximately £110bn of the £330bn with-profits assets as at the end of 2009.