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With-profits AVCs outperform unit-linked funds

UK– With-profits AVCs (additional voluntary contributions) are performing considerably better than managed unit-linked funds, with all but one with-profits AVC funds over three, five and ten year periods reporting higher returns, according to research published by Watson Wyatt.

According to the survey, the average with-profits AVC fund over three years returned an annual 6%, against a loss of 5.7% for its unit-linked counterpart. Similarly, over five years, the with-profits fund produced a return of 8.1% against a unit-linked loss of 0.4%. Over ten years corresponding figures are 9.5% and 5.6%.

Says Andy Parker, a senior consultant with Watson Wyatt: “Both types of AVC fund represented in the survey have suffered as a result of the falls in the equity markets, but the smoothing of returns to investors over a number of years has clearly favoured those invested in with-profits.”

Watson Wyatt says that historically with-profits have always been the most popular AVC option but, despite the greater returns, the research suggests that many in the industry actually complain about their performance levels, inflexibility, early-exit penalties and lack of transparency.

“One needs to consider whether the competitive position of with profits AVCs can continue into the future. Bonus levels have fallen significantly over the last few years and in the wake of the saga surrounding Equitable Life, formerly the UK’s largest AVC provider, there is a need for greater transparency in with profits funds,” Parker comments.

AVCs allow employees to top up their company pensions by making extra personal contributions beyond that required by their scheme.

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