Here we are at session number 59 , and we’re going to be talking about Zombie Funds – Hence the Shaun of the Dead clip before the intro music – love that film.

So today we’re talking about Zombie funds and Zombie policies. What on earth does that mean?! I suppose a definition of a Zombie policy is a savings plan or pension or a policy, issued by a life insurance company which is closed to new business. These policies often carry very high charges for transferring to a new policy somewhere else, so they tend to get left where they are and often forgotten about. But this is your money, and we need to put it to good use! So as usual let’s first give you what you need to know and then we’ll look at what you should do if you have one of these plans of the undead.

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But first…

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Everything you need to KNOW

1 – How Zombie Policies have come about

Retail Financial Services has changed beyond recognition over the last, say, 30 years in this country. Even when I joined the industry in 1998 it looked very different to how it looks now. Back then, life insurance companies were the mainstay of how the industry was built. For over 200 years (some of them) the insurers “encouraged” us to save by sending men round to the house every four weeks to collect premiums. A perfect system for those without bank accounts, which back in 1780, was pretty much everybody.

As antiquated as that seems now, my first job in personal finance was as an insurance agent and I would trudge the valleys of South Wales with my Debit Book, taking premiums from people, sometimes 10p per month or even 1p for a really old policy, writing it in my book and signing theirs. Of course, the Direct Debit system killed off that practice, but it was fundamentally a good thing. Customers knew their man from the Pru, or the Co-op and had the savings habit put into them from a very early age – it was just the way it had always been done.

Insurance agents were really salesmen of course, and in the 70s, 80s and 90s that sales culture really took over, all driven by commission. If I sold you a life insurance policy or a savings endowment or something, I would be paid a commission by the company. This, along with pressure to sell coming form managers, undoubtedly led to many mis-sold policies. Couple this with weak regulation and various scandals ensued such as gold-plated pensions like those of the miners were transferred to personal plans with no guarantees. Mortgages sold with endowments – I’m quite prepared to admit I sold couple of those myself – while fine in principle ended up being a bad idea in hindsight as the endowments themselves failed to live up to expectations.

A side stream of Independent Financial Advisers arose, working not for one insurance company, but able to choose the best plan for their clients form the whole market. But still the barrier to entry to be a financial adviser was woefully low and many barely-qualified and unsavoury characters found their way into financial services because it was so easy to do so.

I’m in danger of giving you an entire history of the UK financial services industry here, but suffice to say at this point that the world has changed. The two biggest factors in bringing about this change, I believe, are tighter regulation and the advent of the consumer internet.

Because of these factors and the invention of things like investment platforms, which created a much more nimble way to invest, the life companies’ offerings began to look staid and old-fashioned. Who wanted a 10 year endowment where you couldn’t see what was going on under the bonnet, when you could have a shiny new ISA with immediate access and online reporting?

And so, many of the insurers fell out of favour. The better-run companies merged and pivoted, so the likes of Aviva, say with a massive multi-pronged business are as big a player now as they have ever been. But other companies clung onto the old ways and have been left behind.

Many of these companies have been bought by consolidators because they often have billions, tens of billions under management, on which it is fairly easy to make a profit. So for example, Pearl Assurance, Royal & SunAlliance and NPI are all under the Phoenix Group umbrella. Friends Provident and Sun Life are part of the Resolution group. All these companies used to be powerhouses in their own right, but they have been reduced to zombie companies, sitting on huge assets and with equally huge liabilities to customers for decades to come.

We now have a huge swathe of the financial services sector in this stagnant, and slightly smelly corner of the market. Which of course means many millions of people will hold policies issued by these walking dead firms. What does that mean for the policyholders?

2 – The impact of a life company closing

As I said, many of these insurance companies are now part of consolidation firms, and the new owners of these insurers obviously want to get as much profit out of them as they can, and so they stop advertising for new business, and stop innovating new solutions.

They pare back the administrative staff to a minimum. We deal with these companies every day on behalf of our clients, and we will often request some paperwork or something and the numpty on the end of the phone will say: “that’ll be 15 working days”. We’ll ask them if they can fax it instead, and they’ll say something like, “that’ll be 20 working days.” Seriously. If we ask them to email information to us, and they’ll spontaneously combust.

They don’t hire the best fund managers to look after the investments. They don’t care much about performance figures because they’re not touting for new business. This is your money, remember, and they don’t have the best people looking after it.

3 – What kind of charges can apply

Broadly speaking there are four types of plan which might fall under the zombie policy definition: Pensions, investment bonds, endowments and whole of life insurance plans. Obviously these all have different purposes, but they all have underlying investments. Those investments will have charges attached, just as any investment would.

If the investment is With Profits, you’ll basically have no way of knowing exactly what the charges are. With Profits is an old-fashioned way of investing where all your money gets put into a black box. It’s invested with everyone else’s money and depending on how well the fund does throughout the year, you’ll get a bonus. But you might not. No-one really knows how it works!

Alternatively, you may be invested in a fund of some kind, which is more transparent than With Profits. Then you’ll have an annual management charge for the fund and a more explicit charge for the policy itself, usually called a policy fee. These two charges together can really add up, maybe to 3% or sometimes even 4% per year.

There may well be a hefty exit penalty if you were to move the policy to another provider or to surrender it completely. We’ve seen charges up to 25%, which is just scandalous, but which doubtless the details contained deep in the contract somewhere.

And finally you may have already paid a hefty charge when the commission was paid to the adviser who originally sold the policy to you.

Add this all up and its possible that you’ll be making little or no money at all on these plans.

4 – The FCA may be coming to the rescue, but probably not.

A couple of weeks ago, the financial regulator, the Financial Conduct Authority announced that it will launch an investigation into these policies, of which there are estimated to be 30 million in existence, sold between 1970 and 2000 worth a total of £150 billion. This review is good news, though it has been overshadowed by the way in which the announcement was made which adversely affected the share prices of some major insurers. I’m sure none of the policyholders would be too upset about that, but with publicly traded companies, you have to be careful about such things. Hopefully the controversy surrounding the announcement of the review won’t overshadow the actual work of the review, which is doubtless a positive thing.

That said I wouldn’t hold out much hope of a regulatory knight in shining armour coming to the rescue of abandoned policyholders.The review is to check whether insurers are using returns from zombie funds to cover the costs of other aspects of their business. I doubt very much that the FCA will sweep in and demand that all zombie policies and funds be converted overnight to modern, fresh, transparently charged versions. If they did, the insurers would probably fail over night, and we can’t have that.

Summarise KNOW

So we’ve looked at how Zombie funds came about, what the impact of them is, the charges and we’re aware that the FCA is sort of, maybe, possibly going to do something about it, but probably not very much. If they’re not going to do anything to rescue you, what can you do yourself?

Everything you need to DO 

1 – Hold tight for now

Hang on. Hold tight for now? That doesn’t sound much like an action step!

You’re right, it’s not. But it is a warning against knee-jerk reactions. Every policy and every policyholder is different and there’s no sense possibly throwing away decent benefits under some of these old policies. The FCA review, while unlikely to come directly to your rescue, may impose certain obligations on the providers of these zombie funds and policies which may make things a bit better.

While you’re waiting for the regulator to pull its collective finger out, you may also want to take matters into your own hands.

2 – Find out how, exactly, your policy is invested

Much of the reason that these policies are in the state they’re in is due to apathy, not only on the part of the provider, but also, dare I say it on the part of the policyholder.

Let’s not forget, this is your money they’re supposed to be looking after. You worked hard for that money. Or you sucked up to a rich relative who bequeathed it to you. Either way, no-one is going to fight your cause better than you. So you need to take matters into your own hands and get as much information as you possibly can about these plans.

You should start by finding out how the zombie policy or fund is invested. This will likely require a phone call to the provider or better still, a point by point letter asking the following:

• What is the name of the fund or funds in which you are invested?
• What is the annual management charge of that fund?
• What other charges are applied? Ask for a breakdown, not a total.
• If With Profits, what has the bonus rate been for the last five years?
• If With Profits, is there currently a final bonus payable?
• If With Profits, is there a Market Value Reduction currently payable on surrender or transfer away?
• Is there are fact sheet for the fund to show how it is invested and who is running the fund?

If you ask these questions over the phone, the numpty on the other end is quite likely to have an aneurism, so it might be better to do this in writing after all…

3 – Find out, exactly, what the costs would be to move or surrender your policy

But you’re not done yet. I would ask specifically the what the repercussions would be if you surrendered or moved the policy. Would charges be taken from your fund? If so, how much.

A really important point is to find out whether there are any enhanced policy benefits which would be lost on surrender or transfer out. For example there are old pensions kicking around with guaranteed annuity rates applying, which means when you come to retire or take the benefits from the plan, you’ll get a far better income than you would by choosing an annuity from the open market. Or you may be eligible for more than the standard 25% tax free cash from a pension.

Ask the question specifically, so that there is no mistaking the intention of the question. Word it something like: Can you detail any enhanced benefits under the policy which would be lost if I surrendered or transferred the policy away?

This is fairly unambiguous, and should generate a decent response from the provider. It might take six weeks, but you should get a good answer.

4 – Ask for a projection of benefits

If the policy is a pension or an endowment, there will be a date looming in the future where the policy will mature or when you will be scheduled to retire. You should ask the zombie policy provider to provide a projection to that date. Now projections are generally not worth the paper they are written on, because they by necessity make assumptions about future returns. You could ask the provider to provide a projection based on current returns, but their systems may not be able to do this. If not, you’re going to have to try and do this yourself…

5 – Do the maths

This is where you may need to know your way around a compounding calculator, or an Excel spreadsheet, or at least be nice to someone who does.

Knowing the value of the plan now, and the costs involved in running it, and having some idea of how the underlying investment has performed over recent years, you may be able to make some scratch calculations yourself.

So for example, if the charges on the plan are, say 3% per year, and the fund is paying a 0% bonus, you know that you’re losing 3% of your money each year. On the face of it, there is no reason why you would continue to throw good money after bad. But maybe there are only a couple of years left, and at the end, a terminal bonus of 25% may be paid. Well it might then be worth persevering for the rest of the term.

I need to be careful not to present scenarios here where it is definitely the right thing to cancel, surrender or transfer out the zombie fund or policy. There are many permutations and combinations of costs and benefits, and I’d hate for you to cancel a policy and throw away excellent, but slightly hidden benefits.

I have had a case where a client had an investment bond which was essentially paying no bonus to speak of and costing 2.5% per year. So he was losing money every year and this was reflected in his statements. He was also going to be charged a hefty fee to surrender the bond. He did so anyway, because his logic was that he could do better shifting that money elsewhere – though this was not guaranteed – and make back the surrender penalty in another, more transparent and better performing fund.

You’ll need to arm yourself with as much information as you can to make an intelligent decision about this. A competent adviser could help you with this. They will charge you of course, which would need to be factored into the calculation. If I were approaching an advisor to help me with this, I would make it clear that this would be a fixed-scope piece of work. That you want a report into the zombie fund and your options for what to do with it. Demand a fixed cost for the report.

If all this maths sounds daunting, that’s exactly the reason why so many millions of policyholders do nothing about this situation. I suggest you cultivate an attitude of getting mad that these firms are holding onto your money and doing nothing with it. Channel that anger towards the task of finding out the best thing to do.

Summary

It can be frustrating, being stuck in a policy you don’t want, but which contains your money. Again, use that frustration to drive you to action and get answers to your questions. And keep an eye on the press for the results of the FCA investigation – you never know, they may surprise us with swift decisive action…

This week’s reviews

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News

Very annoyed – no weight loss this week, despite best efforts. Still motivated and pressing on. But having done everything right this week, I am surprised. I have experienced this before and it can be disheartening, but it can often be followed by a good loss the following week. Fingers crossed!

Next Session Announcement

Next time I’ll be taking to Damien Fahy of the moneytothemasses blog. Damien has just launched a great little book of small things that can make a difference to your finances. I know you’ll enjoy the interview; Damien’s a top bloke and definitely a kindred spirit. If you have a financial query that you want answering here on the show, then the best way to do that is to leave me a voicemail at meaningfulmoney.tv/feedback

Outro

That's it for this session of the MM podcast, I hope it was helpful. If I missed anything or if you have any questions, please leave them comments section below

I hope you enjoyed this session. Thanks for listening – I'll talk to you next time.