One of the most common questions we are being asked is why did we sell ARM within our RITA contract in the first place so again we will try and answer.
It is a fact, annuities are both poor value and in some cases unsuitable due the low initial income, total lack of flexibility and lack of inflation proofing. The calculator on this link shows the true rate of return for an annuity based on how long the average person lives ( http://www.my-rich.co.uk/info/InflationCalculator.aspx ). Most annuities today, based on average life expectancy provide true returns (taking into account the total loss of all capital at outset) of less than 2% per annum.
It should also be noted that conventional annuities are irrevocable once established and cannot take into account any changes in lifestyle or health during the payment term. One could ask would anybody commit to a 25 year mortgage that could never be changed in any way? That is exactly what you are doing when you buy an annuity. However, unfortunately there is very little alternative for most people and this is why Rockingham has specialised over the last seven years in ensuring that we secure the best possible annuity for customers (over 18,000 of them) in terms of rate and annuity type.
It is also a fact that in general income drawdown products are expensive and also unsuitable for most people as almost all drawdown plans are based on anticipated returns from Equities, Bonds, Gilts and Property. Anyone who went into conventional drawdown and invested in these areas five years ago will now almost certainly be regretting that decision.
It was Rockingham’s aim to develop a genuine alternative that gave people the flexibility of drawdown with some of the underlying capital protection offered by an annuity.
RITA was created to meet those needs in that the SIPP, the ‘Wrapper’ the RITA drawdown was contained within was offered for free, which is as low as you can go in relation to charges.
Rockingham then considered which investments to put into the structure and, came up with three core investments, Prudential’s Trustee Investment Plan which has a 100% capital guarantee as did the second the Met Life Guaranteed Investment Bond. The third investment was a life settlement fund and we chose the ARM Assured Income plan which whilst not containing explicit capital or income guarantees was an asset class that was described by many at that time as low risk with the underlying assets being guaranteed life assurance contracts underwritten by A rated insurers or better. The following link provides examples from many journalists and fund managers who believed life settlement funds to be a Low risk option for investors, and we make no excuses for repeating this slideshow as it is easy to rate an investment with the benefit of hindsight. The simple truth is that at the time we, along with a great many others considered life settlements as lower risk than equities and if the truth be known they still probably are if they are not starved of new cash or bled by a run of redemption requests. (http://www.armhelp.co.uk/slideshow.htm ).
Rockingham selected the ARM bond after months of extensive due diligence on not only ARM and its Directors but on the Asset Class itself. We also directly contacted the other support companies that ARM used to establish the bond (counterparties) without ARM’s knowledge to check their credentials and their legal relationships with ARM. Rockingham also studied the Deloitte’s actuarial modeling associated with the ARM bond and were happy that the bond was capable of producing the anticipated returns suggested by ARM over the period of the investment.
Our research also showed that returns on Life Settlement policies were running at 18%-22%. In addition we considered in depth every single risk area associated with the investment and asked ARM for their mitigating actions to reduce client exposure to the identified risks. These risks and associated mitigating actions were then reflected in the documentation provided to all clients.
Our interpretation of the core risks, that would significantly affect the bond were covered by the natural currency hedging and the wide diversification of policies within the portfolio creating a defined spread of health conditions should there be a cure for cancer for example that would affect the ultimate Life expectancy of the insured group. ARM also gave us full details of their methodology of covering liquidity risk including the potential sale of policies and the raising of cash by a third party liquidity facility if required.
ARM also provided us with Deloitte’s actuarial model for the fund which depicted the results of over 5,000 permutations in relation to maturities at different times and their relationship to expected mortality and cash flow. These showed without doubt that provided the bond continued to receive regular inflows of new investment until 2015 that the ARM bond would contain millions of dollars in surplus funds by 2025.
Unfortunately Rockingham did not consider that the risks associated with the cash flow modeling by Deloitte’s would actually be exacerbated by the Lux and Irish regulators themselves who were also provided with the same Deloitte’s reports by ARM. We also did not consider the basic mechanics of the ARM bond complex and certainly no more difficult to understand than many other investments including bank deposits especially for those banks that have casino style subsidiaries. It is a simple fact that very few investing individuals know where bank deposit money is invested other than in subprime American Mortgages or Greek national debt.
The bottom line with the life settlement asset class is that the basic underlying asset ‘risk’ (the whole of life insurance policy) is without doubt ‘low’. The Insured individuals are regrettably going to pass on and it is regrettably for them just a case of when. If premiums are therefore paid on the policy to maturity then the proceeds will be paid out to the legal owners. In fact there has never been the case where an American whole of life policy has failed to pay under these circumstances in the last 100 years.
As a result of customers wanting to invest more of their funds into the life settlement asset class back in 2009/10 we started to promote a small number of other life settlement investments. In total we sold these products to 39 people. At the time of placing these contracts we were not advised by the product providers or our external compliance contractors that these investments were classed as UCIS (Unregulated Collective Investment Scheme’s) and as a result we did not obtain full sophisticated or high net worth Investor sign off for these clients although the vast majority would have been eligible to make the investment. As a result of this Rockingham has recently been fined by the FSA for this breach in regulatory protocol and been criticised for not understanding the ARM bond which we totally refute, and other related matters.
We would like to make it clear that the ARM bond is not a UCIS investment under FSA guidelines. It should also be noted to put the 39 UCIS cases into perspective that that over the last 7 years Rockingham has successfully completed annuity and retirement income business for over 18,000 clients.
For whatever reason, if the CSSF had granted ARM a license in 2009 things would be very different now for us all.