As the bear market tightens its grip and high net worth clients start seeking safe havens for their money, Traded Endowment Policies (Teps) are being promoted as an attractive option. Yet even with many policyholders in line for windfalls, Teps are still yet to truly capture the imagination of many UK financial advisers.
Teps are traditional with-profits life assurance contracts that instead of being surrendered by the original policyholder, have been on-sold part-way through their life on the second-hand market.
As with any traditional with-profits policy, each Tep includes a basic with-profits sum assured, with annual bonuses guaranteed once added and ultimately a terminal bonus provided at the completion of the policy.
“They have much higher guarantee levels than the unitised policies,” says Tep specialist Jo Bridger, head of marketing at PolicyPlus.
Brian Goldstein, chairman of the Association of Policy Market Makers explains that there is a significant difference between buying an endowment policy mid-term and taking it out at inception. “First of all when you buy it you can see what is there in the policy. You can see the bonuses that have accrued to date because they’re declared every year and those bonuses once allocated to your policy can not be taken away,” he says.
Bridger suggests there are ample Tep policies currently available as people look to consolidate their finances.
“A lot of people are looking at either reducing their mortgage level or raising some cash and so one of their options is to sell their endowment policy,” she says. “There is also lots of demand from the big endowment funds which does have an effect on prices, but there is still plenty of value out in the market for investors.”
High net worth clients can invest in Teps either by buying policies individually on the Tep market and putting together their own portfolio of policies or investing via a traded endowment fund offering a collective approach.
Individual policies can be purchased from around £5,000 or £6,000, with the investor responsible for ensuring the ongoing premiums are paid. Tep funds on the other hand can offer a greater level of policy diversity and require less administration as the fund itself looks after paying the ongoing premiums.
Teps are billed as being at the lower end of the risk spectrum with potential for good growth. They can be wrapped inside Self Invested Personal Pensions, Small Self Administered Pension Schemes and off-shore bonds.
Returns vary depending upon what has been paid for a particular policy, but Bridger suggests investors should expect to see gains of seven to eight per cent. “And if you plan it carefully, there shouldn’t be much capital gains tax to pay,” she adds.
Protected Distribution Limited markets the Protected Asset Tep Fund and its business development manager Alastair Beattie says there has been a surge in demand for policies underwritten by Aviva, the Prudential and Legal & General, as these firms looked to release some of their orphan assets to policyholders. These are surplus assets that have built up over the years within the funds.
Aviva is currently negotiating a reattribution of £5 billion, Pearl has already begun allocating additional bonuses and Goldstein suggests Legal & General have also been mooted as looking at a reattribution, which he says could be worth around £1 billion. However, the Prudential recently decided against doing the same with its inherited estate of £8.7 billion.
“If you said to me how much is out there, it’s a total guess, but I would guess £30 billion to £40 billion and that’s another add-on benefit or bonus for those who wish to invest in the policy,” he says.
Particularly with closed funds, reattribution of surplus assets is needed to ensure that the theoretical “last man standing” in a fund, does not end up with all the spoils.
Goldstein also explains that most life companies have stopped selling endowment policies and as a result the universe of policyholders is declining.
“Because the funds have been performing quite well and they’ve been building up their reserves and also because the life offices are cautious, they have not yet reflected that in the bonuses that they’re declaring. So bonuses are lagging behind the performance of the fund.”
Yet despite these factors, most of the Tep sales within the UK market are now made abroad, particularly to Germany whose investors see these products as undervalued, and via institutional investors who have been buying them for closed ended funds.
Goldstein points out that investors in Teps do need to be aware that they will not receive an income until the policy matures. However, because they are flexible and every policy different, Teps can be used to meet a range of different investor needs, including paying for school or University fees, by investing in policies that will mature in time to fund such costs.
Evolve Financial Planning director Jason Witcombe’s attitude towards Teps is typical of many advisers. He says Evolve does not actively steer clear of them, but makes little use of Teps.
“Our approach is to try and keep client’s investments as simple as possible and a Tep, or the concept of it, isn’t the most simple thing in the world. We just don’t feel there’s a need for that type of product within our client’s portfolios – other people will.”
Witcombe says he is also not a “big fan” of with-profits as an investment philosophy, because of its opaqueness. “Some people will look into them in a lot of detail and really like them, but I can’t imagine many advisers will do many traded endowments. It will be a few advisers doing a lot of them.”
But the Protected Asset Tep Fund No.2 describes itself as the largest traded endowment policy fund in the world and as being designed for the more cautious and experienced investors, yet offering a steady, solid return in a time of market volatility. The Sterling fund has produced total returns over three years of 22.95 per cent and since inception in 2003 has produced returns of 43.05 per cent.
Other smaller funds do exist including investment trusts such as Life Office Opportunities, the BGI Endowment fund and Allianz Dresner.
Beattie says Teps are not yet a high-profile asset class in the UK, despite the fact the life offices issuing the policies are among the largest financial institutions in the world.
“Many assurers’ with-profits funds are performing well and the nature of the asset class mix is suited to present market conditions,” he said.
Beattie suggests that investing in Teps via a fund provides significant diversity benefits – the Protected Asset Tep Fund, for instance, contains around 30,000 policies. “Individual investors can’t get that kind of diversity,” he says.
Beattie lists the other benefits of Teps as the fact they demonstrate a low correlation to equity and interest rate markets and that competitive returns are on offer when compared to those available from cash deposits and other low-risk asset classes.
“It’s a good solid performer. If you’re looking for around a 7 per cent return on your money and being able to sleep at night, this is the place to be,” Beattie says.
But in the same camp as Evolve Financial Planning’s Witcombe, Harry Katz, principal of Norwest Consultants describes himself as “not bursting with enthusiasm” for Teps.
He believes they have a place in the market, but argues they are ultimately still invested in the stock market and within with-profit funds – which he too describes as “a completely opaque product. I can understand it, I can explain it, but the client’s don’t like it.”
He also points out that high net worth clients looking for low-risk investments can get 6.5 per cent for their money in the bank, with little hassle.
So, while Teps may have great appeal to German investors, it appears even in today’s volatile markets they have some way to go if they are to convince UK advisers that they deserve a place in their high net worth client portfolios today.
Case Study: Addidi’s approach to Teps,
Anna Sofat, director of Addidi
Anna Sofat, director of Addidi, believes that Traded Endowment Policies (Teps) can offer potential as an investment option for high net worth clients, but warns that investors need to be wary about the valuations being put on them.
“I’ve known people who bought some in the late 1990s and really ended up getting their fingers burnt. They don’t always go one way,” she cautions.
While she does not put together Tep portfolios for her clients, Sofat suggests that there are some endowment funds that may be worth buying into. However, the decision would have to come down to the quality of the life office standing behind the policy and the assumptions being made about bonus payments.
“Probably if you have been buying them in the last couple of years it may be that you’ll do OK, because the assumptions are quite low. But I think it depends on what you are buying,” she says.
Sofat describes with-profits policies as notoriously difficult to underpin in terms of what an investor may or may not get back, as the life office retains significant discretion over what is paid out, even if it is publishing its investment principles and policies. As a result, if markets fall so too can bonuses.
“It isn’t an automatic assumption that you will get what is forecast – there is an element of risk there. That element boils down to the assumptions you’re making about what the future bonus rates are going to be and also what the terminal bonus might be,” she says.
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