MOST savers may have abandoned unit linked life assurance savings policies in the past few years, but some insurance companies believe that with relatively stable interest rates and strong investment markets, there is still some life in the concept of regular in vestment in a mainly equity based managed fund.
The launch by Ark Life, a subsidiary of AIB Bank, last week of its new Personal Investment Plan (PIP) and PEP savings plans, in which high initial charges are abolished in favour of spreading the annual management fees over the life of the contract, has given a boost to a savings concept which was once but no longer the most popular product in every life company's sales portfolio. Ark insists that equity investment is still a realistic option for savers especially medium term ones if the cost structure can be contained. These new plans, says Ark life's Brian Wood, "are very much aimed at people wit 10 year savings agenda"
It is only a matter of weeks before Ark's bank rival, Bank of Ireland's Lifetime Assurance will launch its own PIP style savings policy and we also understand that Irish Progressive, which is now owned by Irish Permanent, is also re vamping its savings and other assurance products.
The reaction of other life assurers to Ark Life's bold move varies from outright welcome from Equitable Life, a non commission based company which has been selling low initial cost policies on the Irish market for five years, to less enthusiastic responses from others which told Family Money that they need more time to examine the fine detail of the Ark Life offering. A popular view is that industry resources are mainly being devoted to the sale of pension and protection (i.e. term assurance) contracts and that there is little point in trying to sell a product which has lost the confidence of most investors,"
A spokesman for Irish Life, the biggest player in this market, said that its priority was in proceeding with its Policy Review exercise which began last October. Over 100,000 existing savings policy holders are to be contacted and, in an attempt to improve returns, offered an option of a guaranteed return should they agree to continue saving for another three or five year period. Sales of pension and term life policies are also being given a high priority, said the spokesman.
The relatively high management fees that are being charged by Ark Life 1.5 per cent per annum for the PIP and 1.75 per cent for the PEP were criticised by a number of company sources which acknowledged that the Ark Life returns will appear better than their products which carry initial sales commissions and company charges in the short term, but will become more costly over longer periods.
The mutual life companies, which are best known for the sale of traditional with profit policies made the point that their endowment contracts continue to offer better value after a 10 year period, even with paying out initial commissions and charges. With profit policies are also attractive for their annual, secured bonuses and the potential for a terminal bonus, they said, spreading out returns means that investors do not experience the volatility of unit linked contracts.
Ross Barry is an independent life and pensions broker based in Stillorgan, Co Dublin, who offers his clients a fee based payment option. He has conducted a "value test" on the new Ark Life PIP, a plan with no initial commissions or charges but rather a 1.5 per cent annual management fee and the standard 27 per cent tax rate on growth.
As our comparison chart of some of the better known unit linked companies shows, there is only a slight growth differential between conventional unit linked plans which deduct initial commissions and charges Ark Life's PIP and Equitable Life which dispense with these charges in favour of annual management fees perform the best. But how would the Ark Life PIP perform if it was compared to a traditional with profit endowment in which there are both initial charges and an annual management charge of 0.5 per cent.
"I am a strong supporter of traditional with profit policies," says Mr Barry. "And while I think the Ark Life policy is a move in the right direction for unit link contracts, especially for people who don't want to commit themselves for a long period of time, I decided to compare a 10 year, 15 year and 20 year Ark Life PIP to a Norwich Union with profit policy over the same period. Total contributions were £1,000 a year (£83.33 paid monthly) using the higher 9 per cent return allowed by, the IIF.
"What I discovered is that the AIB product is a better performer in the earlier years for each of these three time frames. But if you take the 10 year term product, the value of the Norwich fund begins to exceed the AIB one from year nine. With the 15 year term the Norwich plan produces the better return from year 12 onwards and with the 20 year plan the Norwich endowment produces a better return from about year 14.1 believe the reason is that the higher PIP annual charge begins to make a bigger impact from those dates."
Ark Life's other new product, the Personal Equity Plan, which requires a minimum investment of £100 a month (rather than a £40 minimum) is subject to a low tax regime of just 10 per cent rather than 27 per cent and Mr Barry concedes that it (the PEP) would most likely produce a better return in comparison to the endowment because of the lower tax regime.
