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Zombie funds £3 billion bill

From the Sunday Times 26th Nov 2006

Zombie fund victims lose out on £3bn

Millions of people are suffering in underperforming with-profits schemes, despite reassurances that the new owners would boost returns. By Philip Scott
MILLIONS of savers are still trapped in sub-standard with-profits funds that have closed to new business, despite repeated calls for financial watchdogs to alleviate their plight.

Policyholders in these “zombie” funds were led to expect improved performance when firms such as Resolution and Pearl started to snap them up in 2004.

However, new evidence reveals they have failed to turn the schemes round. Investors in policies that are now owned by these firms missed out on returns of up to £2.7 billion in 2005 because they lagged open funds and other closed schemes, according to AKG, a consultancy.

Hundreds of thousands of people are unable to get out of these plans because firms charge penalties of up to 20%, despite calls for the Financial Services Authority (FSA), the City regulator, to abolish the fines. Liberal Democrat Vince Cable said: “City institutions have managed to trap millions in underperforming funds. The FSA should be looking at this more seriously.”

The scale of the scandal is astonishing: savers have a total of £95 billion tied up in closed with-profits funds via endowments, bonds and pensions. Another £332 billion is in funds that are still open for business.

Clive Cowdery, who set up Resolution, has bought an estimated £42 billion of closed with-profits funds. Rival entrepreneur Hugh Osmond, who owns Pearl, has another £15 billion. Together they are responsible for 12m policies — one for every five people.

They claimed they would boost returns but AKG said they had not turned things round. In 2005, the funds of closed-fund consolidators produced average returns of 11.3% against 14.2% for other closed funds and 16.1% for schemes still open for business. The FTSE 100 rose 17%.

A saver who cashed in a 25-year endowment after 20 years, into which they had saved £50 a month, would get an average of £20,880 from closed funds in the hands of consolidators, compared with £22,467 from other closed funds and £23,601 from open funds — a difference of up to £2,721. Research also shows their performance relative to open funds and other closed schemes has deteriorated in the past two years.

With-profits policies, which invest in a mixture of equities, bonds and cash, were widely sold in the 1980s and 1990s as a “safe” way of getting exposure to the stock market, but were hit by the crash of 2000.

Many policyholders have challenged exit penalties via the Financial Ombudsman Service, winning back thousands of pounds, but industry experts want further action. Mark Davies of FS Complaints Handling, who has helped thousands win compensation in return for a fee, said: “If the FSA doesn’t sort this out, we’ll form an action group and go down the judicial-review route.”