Asset Security* This article about asset security was first published in April 2004 * On the 8th March, Lord Penrose issued his report into the near collapse of Equitable Life. For those of you unaware, Equitable Life was an insurer and money manager in the UK. It was the oldest life assurer in the UK. And then it closed it's doors to new business. In total it had around 800,000 policyholders (who have mostly now lost money). The background, in truth is complicated and for the lay person, rather boring. In summary, there were more liabilities than assets, but making an assessment of the assets and liabilities of a life assurer is notoriously complex. This factor hid the problem (or enabled the management to hide the problem, as Lord Penrose says) for many years. I could waffle on about this all day. More important though is where does this leave you the individual investor or Equitable Life policyholder? As a policyholder, the government made the position clear. Ruth Kelly MP, Financial Secretary to the Treasury said, "We cannot underwrite each and every company". In other words, there will be no compensation for policyholders who have lost significant sums from their pension plans. This will leave many facing a retirement of financial hardship. They also face punitive penalties from Equitable Life (called Market Value Adjustments) to prevent you from moving your hard earned cash elsewhere. Will we ever get to retire in comfort? In truth, the compensation schemes in the UK are a last resort and offer little real protection. If you are a medium sized investor, with say £50,000 or more in an account or scheme, you really have little protection above that sum. (For the UK banks that figure is actually only £20,000.) Most other governments operate in a similar way. How could they afford to pay more? You may be thinking right now that £50,000 invested 'would be nice' but trust me on this, if you make significant steps towards retirement planning, you will soon have far more than this invested to produce the sort of income you are likely to need. Which leaves you rather exposed financially should anything go wrong. Much of these problems come down to reputation. When Equitable Life began to struggle, did UK plc suffer? Of course not. The UK is too big financially for any one company to have much of an effect (although if Lloyds TSB or Barclays went under, that might be a bit different). In France, Germany or the US this would be the same too. Which is why investment is often safer in the international environment. A quick look at the regulation or asset security of other nations highlights this. As an example, I offer the Isle of Man. Principle industries are sheep farming, tourism, motorcycle races and the financial services sector. If a major player in the fund management industry located on IOM were to go under, funds held by other investors would leave the island looking for a safer home (known as capital flight). Confidence would be dented or lost and the financial companies would probably start closing. The island would be left with sheep farming as it's major source of income. As you might imagine, it suddenly becomes very important that NOTHING happens to the Manx financial services industry. Asset security is an issue for the entire economy. Regulation becomes a key issue. They have the Life Assurance (Compensation of Policyholders) Regulations 1991 as their protection. The compensation scheme offers investors up to 90% of the value of their investment policies with NO UPPER LIMIT. So if you had £1 million invested, you have essentially £900,000 covered. There is really no comparison to the UK here. Of course, the last thing they want is a company failure so the regulation is very stringent, far more so than the UK. Other jurisdictions offer similar benefits. Switzerland has never had a bank or life assurer go out of business, it is illegal for them to do so. The majority of Guernsey's fund managers use companies to hold up to 90% of assets out of harms way. These are known as custodians. Jersey does something similar. Rules in Luxembourg are also very strict (hence the amount of fund assets held there - currently believed to be 655 billion euros). So now you know. You also now know why taxation is not always the number one reason that tax havens are so popular. Sure paying no tax on your money is a big plus, I can't deny that. However, asset security and actually having your money there when you want and need it is an enormous factor too. To read more articles about other investment related topics, please also visit:
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