BOS provide exit option for struggling with-profits investors
(12/3/2005)
BOS provide exit option for struggling with-profits investors (12/3/2005)
A consortium of financial institutions which is headed by the Bank of Scotland has devised a buy-out option for holders of struggling Scottish Mutual International (SMI) and Clerical Medical International (CMI) with-profits policies.
There are two main areas where a buy-out may be appropriate, and that is with SMI OLAB plans and CMI GGF plans because the banks are interested in buying the future guarantees these plans offer. In the case of SMI they offer a guarantee of 117.5% of the original investment at year 8. In the case of CMI GGF they guarantee a MVA free date at a specified period.
Clearly there are a number of investors who are invested into either CMI or SMI and would like to escape. The problem of course is the fact that there are some very onerous Market Value Adjuster’s (MVAs) on the funds. The alternative to the buy-out option is to wait for a MVA Free Date, and in fact, that is what investors should do if the MVA Free Date is close, and the investor is in a position that he can wait. However, not every one is in the position where the MVA Free Date is close or, even if they can afford to wait for some years ahead, if the client is looking to draw income etc… it may be correct for him to consider a buy out.
The Buy Out by the consortium using the current swap rate, plus a small margin to cover administration. They then look at the Guaranteed Date, the Guaranteed Value, and discount it backwards. The long and short of it is the fact that the client will receive a sum significantly in excess of current surrender value. Stephen O’Leary adds that “It is rather like selling a TEP, at the end of the day you do not want to hold the thing, and what the purchaser does with it is his concern”.
To give an example of how a buy-out may work:
Guaranteed MVA Date 11/10/09
Guaranteed Value 659,000 Euro
Current Surrender Value 450,000 Euro
Buy Out Value 514,573 Euro
Thus in essence the client can sit and wait a further almost five years to receive 659,000, or could sell out right now for 514,573, and reinvest that money, and provided a return of around 5% pa is made the client will be better off.
Stephen O’Leary adds that “If the case is leveraged, by removing the bank, the client is likely to feel more comfortable, by taking the Buy Out, the client will no longer have the threat of margin calls etc…”
Candour Consultancy is an authorised introducer to the Bank of Scotland backed buy-out scheme and can introduce you to their Middle East representative. Candour also advises on a range of options and ‘recovery’ funds for holders of other with-profits policies.
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