Closed with-profits funds
last updated July 2005
When a with-profits investment fund is closed to new business, it has little prospect of raising additional capital but still has to cover its liabilities. It may need to take ‘management actions’ to protect its solvency and the general interests of all policyholders. This can give rise to fairness issues. Ultimately, the fund needs to demonstrate to the FSA that any proposed management action is appropriate for the protection of policyholders as a whole and is fair in the particular circumstances of the fund.
The FSA published a sector briefing on its approach to closed funds on 28 September 2004. The briefing set out some of the general considerations relating to closed with-profits funds and focused on how the FSA regulates them.
The ombudsman service started to receive a small number of complaints from policyholders in closed funds. Those complaints tend to turn on issues that are specific to the individual case. But the ombudsman service concluded that it could well start to receive complaints which turn on a general allegation that a particular with-profits fund is no longer actively managed as a result of being invested in fixed interest assets.
The ombudsman service and the FSA jointly identified that this gave rise to a wider implications issue. The ombudsman service decides cases on the basis of their individual circumstances, but the interests of the individual policyholder who complains might be in conflict with general interests of all policyholders. The FSA would have an overview of whether or not the fund’s approach to investment was a legitimate exercise of commercial judgement aimed at the interests of its policyholders as a whole.
In the light of this, in 2005, the FSA published on its website a description of its process for considering management actions by with-profits insurers. The FSA has also produced information for consumers to help individual policyholders understand the position and the available options. In turn, this will help the ombudsman service explain the background issue to individual complainants.
The FSA will also provide the ombudsman service with relevant information in relation to the FSA’s overview of particular funds so that the ombudsman can consider, in individual cases, whether a fund’s investment decisions can be regarded a legitimate exercise of commercial judgement aimed at the interests of all its policyholders.
For similar issues relating to open with-profits funds see case study WI-A07.