With its hugely popular PruFunds range, Prudential has come to dominate the income drawdown market, but rival providers could be ready to challenge the insurer’s market monopoly.

As the defined benefit (DB) transfer glut continues, funds that smooth out market volatility are increasingly demanded by IFAs. With this rising demand it is inevitable that other providers will attempt to come up with their own with-profits offering for advisers.

As New Model Adviser® revealed last month, Aviva is set to launch its own version of the PruFunds range, and with Prudential encountering its administration issues with its largely PruFunds-based Retirement Account, some advisers are welcoming the competition. 

Will Prudential maintain its position on top of the income drawdown pile? As the Financial Conduct Authority (FCA) prepares another probe into with-profits, could a market shake-up deliver improved products for clients and advisers?

Volatility protection

The PruFund range uses the with-profits format: pooled investments providing regular bonuses for investors that hold back growth in good years to try and smooth out market volatility.

It combines this with a multi-asset strategy, using its vast amount of capital to make big-scale investments, including infrastructure projects such as hospitals, to provide good levels of income.

Other providers’ with-profits funds have largely been wound down in recent years. For example, Legal & General closed its with-profits fund in 2015.

Prudential has become the dominant player in this market; advisers, in the main, give positive reviews of its range.

According to the Association of British Insurers, Prudential had a 30% share of the adviser income drawdown market at the end of 2016. The range had £24.7 billion of assets under management, compared with £16.5 billion at the end of 2015.

Eamonn Flanagan, an analyst at Shore Capital, said the success of its with-profits funds has been down to a combination of the Pru’s financial strength, huge capacity as well as the underlying performance of M&G’s investments.

‘A fund is only as good as the fund performance and this is delivered by M&G for Prudential. And M&G’s performance has been terrific,’ he said.

He said in previous years the with-profits market has been opaque, with investors unsure about charges and returns. However, the ‘new style’ adopted by Prudential has managed to move this on to a much more transparent model where costs and expected returns are much clearer, Flanagan said.

While it is clear Prudential has made a success of its PruFund strategy, competition is on the way as New Model Adviser® revealed last month that Aviva is gearing up for a similar product launch.

New Model Adviser® has seen a fund proposition document from Aviva which provides details of its upcoming Smooth Managed Fund (SMF) which it expects to launch in the autumn. According to the document, the SMF is targeting an initial expected growth rate of 6%, which will be reviewed quarterly.

A section of the fund factsheet specifically compares the SMF with the PruFund range.

‘Our asset allocation has more of a global focus v Pru’s focus on UK assets,’ the document said.

The on-going charge will be 0.65% and the all in price, including platform fee, will be just under 1%, which it claims is less than Pru’s typical charge of 1.1% and 1.2%.

Aviva also says the fund will be more flexible because it is available on the insurer’s platform, unlike the PruFunds. The provider said it is going with just one fund, compared to the range offered by Pru.

A spokeswoman from Aviva said it was ‘natural’ for Aviva to launch a product in this area because of market demand.

‘We understand there is customer demand for funds that offer protection from stock market volatility so it is natural that we would look at this area. We have carried out some very early concept work to test ideas and we are continuing to develop our thinking but this is at an early stage.’

With-profits rivals

Abraham Okusanya (pictured above), director at research firm FinalytiQ, said Aviva could use its existing AIMs mixed asset strategy in any overhaul of its with-profits fund and said Aviva was in a strong position to rival the PruFund range.

‘How a new with-profit fund can be different is you take the smoothing mechanism of the old with-profit funds and combine it with the new multi-asset strategy,’ said Okusanya. ‘If anyone can do this it could be Aviva because it is experienced at doing this.’

James Relph (pictured above), managing director of Swindon-based IFA Executive Wealth Management, said he would welcome a ‘price war’ between Pru and another provider.

‘If we could see more competitors it would be a good thing. With charges it would be good to see charges coming down a bit, and a price war may help,’ he said.

John Sutcliffe, director of Sunderland-based WJR Financial Solutions, also uses the PruFund range as part of his financial planning but would welcome an Aviva launch.

‘We see the PruFunds as a nice base for the portfolio but we have been looking for an alternative for a while just as another diversifier. As long as it’s viable and cost effective it will definitely be a big competitor to the Pru,’ he said.

Administrative blunders

A desire for more choice may not be the only reason why advisers are pleased to see another player come along. Indeed, the Pru might be thankful its customers did not have a ready alternative when an administrative error recently hit thousands of its PruFund investors.

Last month New Model Adviser® revealed Prudential was reviewing 17,000 of its new Retirement Account (which was often used for the PruFunds range) after administrative errors had meant some clients were not taxed in the right year.

The insurer has now started to offer £100 goodwill payments to customers affected by the administrative errors, on top of any redress due.

Some advisers may be thinking now is a good time for an alternative provider to come along offering a similar product.

This may have been the biggest administrative blow up for the PruFund range, but apparently it was not the first.

Scott Gallacher (pictured below), director of Leicester-based IFA Rowley Turton Private Wealth Management, said he has previously encountered administrative issues with Prudential.

‘We have had various issues with the Pru, including it claiming it has sent stuff to people that were never received and with-profits policies bearing no relation to the claimed returns on the fund. Fundamentally we have avoided Prudential for a few years, which is a shame because at one stage it was a really good IFA supporter,’ he said.

Prudential said it would ‘welcome’ more providers competing in the retirement market using with-profits type offerings that smooth returns.

Vince Smith-Hughes, director of specialist business support at Prudential, said: ‘I think we would really welcome other providers coming into this space because these kinds of funds can really help meet customer needs. Advisers are telling us these funds really help them when they are assessing what a customer might do.

‘I can’t comment on Aviva specifically but I would welcome more providers coming in because I think it will raise the profile of the overall smooth-fund concept.’

Market dominance

Flanagan agreed one more entrant would do little to unsettle Prudential.

‘For a start the market is huge; it’s as big as Prudential is willing to push it. So there is absolutely room for another couple of competitors and, to a certain extent, if a couple more providers come along it kind of rubber stamps the with-profits industry for IFAs.

‘I don’t believe for a second Prudential would be complacent but on the other hand I don’t think it should be overly concerned.’

He said when Aviva does launch in the market it will make a ‘few waves’ but he did not think it is as well positioned as Prudential.

‘Aviva is the biggest insurer in the UK but when you look at the structure it is actually a collection of smaller businesses. The problem is all of those are reasonably sized but they have never been merged and inherently you will have a less efficient cost base.’

He said there are few other insurers in the right position to launch a challenger with-profits range, with talk of more mergers of the life insurers highlighting Prudential’s strong with-profits position.

According to Flanagan, the ‘holy grail’ for the PruFunds would be to get them into the retail market, via a platform, because at the moment the funds must go via an adviser.

One further development is that from August, PruFunds will move from a maximum holding period for funds to be invested from three months to one month, through the Retirement Account for new investments, New Model Adviser® has learned. 

A spokeswoman from Prudential said the changes would allow customers to invest quicker into the funds, as in the current quarterly system if someone sets up an account a day after the quarterly cutoff point they will have to wait three months for the funds to be invested.

When asked if this change would help the PruFunds launch on a retail platform, the spokeswoman said she could not comment.

Transfer business

Another reason why the PruFund range has been increasingly popular could be the rise of DB transfers and with it the need to reduce sequencing risk for these often large transfers into advisers’ portfolios.

Smith-Hughes (pictured above) said the Pru is seeing DB transfer cash flow into its with-profits products.

‘We are having DB transfers coming in that are being re-invested in the PruFund range, and we are expecting to see that happen more so I would expect to see that market continue,’ he said.

But with this rising popularity, the FCA is taking more interest in this market and earlier this month announced it is requesting information from the majority ‘of firms with with-profits business to help us carry out a multi-firm review of the sector’.

Hot on the heels of the asset management study, cost and transparency are likely to feature in the FCA’s with-profits review.