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With-profits X-ray: CIS With-Profits Stakeholder fund

Good performer? This week’s fund may well be a legacy of past government thinking but it is nevertheless relatively modern and scores well on transparency and future performance prospects, says AKG’s Guy Vanner.

Keeping in step with government financial initiatives can be quite challenging. Indeed it is perfectly possible to be following yesterday’s drive when today, those on high, now want you to do something completely different.

Currently we are seeing significant activity by government to get us to spend more, and thus minimise the effect of the economic downturn or even lift the country out of recession.

But was not yesterday’s talk all about a savings gap and the need for compulsion and other measures?

This week’s reviewed fund is a legacy of past clever government thinking; stakeholder pensions. Given today’s predicament, this initiative gives cause to wonder what the situation would be like now if it had caught on.

Review implications

Being of stakeholder origin the fund is modern and quite transparent. While financial strength has been eroded in recent years, future performance is good and advisers may not consider reviewing holdings in the fund as a priority based on its financial strength, future performance and transparency position.

Being of stakeholder origin the fund is modern and quite transparent. While financial strength has been eroded in recent years, future performance is good and advisers may not consider reviewing holdings in the fund as a priority based on its financial strength, future performance and transparency position.

The following extract covering the Co-operative Insurance Society Ltd CIS With-Profits Stakeholder fund is drawn from AKG’s 2007 UK Life Office With-Profits Report (full details: www.akg.co.uk).

Company financial strength

CIS has come under some pressure in recent years and is going through a ‘modernisation’ process to ‘ensure its future as a profitable and growing operation with a distinctive customer service proposition’. It now operates as a long-term business operation with a relatively low level of free assets. Successful implementation of its modernisation plan is key to ongoing financial strength.

Fund background

The fund, a sub-fund of the CIS Long Term Business Fund, was launched in 2001, to provide a segregated pool of assets to meet the requirements for offering a with-profits option when CIS entered the stakeholder pension market. The fund effectively became closed in April 2006, when CIS launched its new individual personal pension product. The fund technically remains open, but it is not actively marketed.

As the name suggests, the With-Profits Stakeholder fund consists entirely of the unitised with-profits portion of CIS’s stakeholder pensions business. The fund is used solely to manage with-profits stakeholder pensions business. The assets of the fund are separately identifiable from the other assets of the CIS Long Term Business fund.

The fund operates on a basis which effectively makes it a smoothed managed fund.

Investment

The fund’s investment strategy is to achieve growth by investing in a wide range of assets, such as UK and overseas equities, government and other bonds, cash deposits and property. The fund’s investment strategy is constrained by the need to hold a diversified range of assets to reduce the risk to the value of the fund that would arise if most or all of the assets were invested in a single investment category.

The fund aims to hold approximately 50% to 70% of the fund in higher risk assets such as company shares and property, including a proportion of overseas shares. The fund does not rely on assets held outside the fund to maintain its investment strategy.

CIS uses in-house investment managers. Equity exposure is achieved either by direct investment or via CIS unit trusts.

Market value reductions (MVRs)

CIS reserves the right to apply an MVR in certain circumstance on claims (except deaths and retirements at the originally selected date). For example, when a large amount of money is being taken out of the fund at a time when investment values have been particularly depressed.Guarantees

There is a guarantee that MVRs will not be applied on deaths and retirements at the originally selected retirement date.

Fund information

Fund: CIS With-Profits Stakeholder fund

Group: CIS

Company: Co-operative Insurance Society Ltd

Fund size: £172 million (by realistic value of assets).

Fund open to new business? No

Are assets ringfenced from other business? No

Fund type: Unitised with-profits business only

Fund classification: Balanced Managed

AKG Verdict

Transparency 4/5

CIS does not have a with-profits committee, but it has appointed an independent reviewer.

CIS states that it wholly supports efforts to improve transparency on with-profits products. It believes this requires policyholders to be given clear and full information at both point of sale and during the term of their policies. It also requires modern products with clear charging structures.

This fund is of modern design, being totally ringfenced and subject to capped expenses. CIS retains a high level of discretion, however.

The annual report to policyholders on compliance with the PPFM (principles and practices of financial management) is quite detailed.

Future performance 4/5

The fund aims to maintain a relatively healthy equity backing ratio, which should augur well for its future performance prospects.

Financial strength 3/5

With-profits business remains the core of CIS, albeit reduced in emphasis in recent years.

While small on a standalone basis, the fund is a sub-fund of the CIS Long Term Business fund and it can therefore rely on the support of both this fund and CIS as a whole if necessary.

Note: AKG accepts no responsibility for investment decisions taken as a result of information supplied – all reviews and prioritisation of reviews must be subject to overriding consideration of individual policy and policyholder circumstances.

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