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LOA responds to FAnews Online E-Newsletter re RIY

22 August 2007 Gerhard Joubert

Response to Gareth Stokes, FAnews Online Editor 22 August 2007

Your newsletter this morning raised a number of concerns around the decision by the life industry to remove projected maturity values from quotations and policy documents by early next year.

You made the point that financial advisers are not in a position to estimate maturity values on savings and investment policies, because they have no control over the investment and expense decisions made by the insurance companies in the management of their clients funds.

You also stated that financial advisers were using the projected maturity value as a simple tool to demonstrate to clients which retirement product was likely to provide the best investment return over the investment period.

It is important to understand that projected values were never meant to be used as a tool for comparing the likely returns from different companies. Instead the aim of projecting maturity values was to demonstrate to clients the value of long term savings and the power of compound interest and to provide a tool for financial planning.

However, projections often resulted in clients believing that the projections were guarantees. This regularly led to disappointment. The reality is that neither the life company nor the adviser is in a position to predict future returns. This is true for long-term insurance savings and investment products as it is for unit trusts or equity portfolios. A projection is therefore not a reliable comparison tool.

You are right, however, that the complexity of charging structures often makes it difficult for clients and their advisers to do proper cost comparisons when deciding on a product.

The LOA therefore introduced a new Code on Policy Quotations in 2005, which requires all LOA member companies to summarise all their actual charges in one figure, referred to as the Reduction in Yield. The RIY must be clearly indicated on all quotations for new savings and investment policies. 

By comparing the RIY figures for similar products from different companies, clients and advisers will be able to see from a single figure how much of the annual investment return of a policy is needed to cover the policy charges. This enables the adviser to deduct that the net investment return from the policy with the lowest RIY has a better chance of outperforming similar products.
 
The LOA is interested in the view of intermediaries on this and we will be monitoring your web site for feedback on this issue. It is important to point out, however, that the LOA consulted widely with intermediary bodies on this issue and that the majority expressed their support for this.

More often than not it is the adviser who has to face a disappointed client when at maturity the policy value does not match the projected value, and for this reason it is also in the interest of intermediaries that the industry moves away from projected maturity values. 

Kind regards
Gerhard Joubert
Chief Executive Officer
Life Offices' Association (LOA)

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