Offshore With-Profits MVAs Explained
Market Value Adjusters Explained
What is a market value adjuster (MVA)?
A MVA is a deduction which may be made from money which is taken out of a unitised with-profits fund to protect the interests of remaining investors when market conditions are less favourable. When applied the MVA is in addition to other charges on the policy.
Why might a market value adjuster be needed?
An investment in a with-profits fund should be viewed as a medium to long-term investment. A with-profits fund is invested partly in equity-type investments, which fluctuate in price over the short term. The Offshore With-Profits Fund aims to provide good, long-term returns to investors by smoothing out the effects of short-term market fluctuations.
Over long periods it can be expected that the bonus rates will be set so that the growth in value of the units and the growth in value of the underlying assets of the policy are similar, but in the shorter term there can be significant differences.
Therefore, in order to protect the interests of remaining investors, there will be periods when it is necessary to reduce the amount payable when money is taken out of the with-profits fund. This will be through the use of an MVA, which brings the amount paid more closely in line with the value of the underlying assets.
In this way the continuing investors are protected from a reduction in their return which would occur if excessive payments were made to shorter-term investors.
When will an MVA not be applied?
Your policy may guarantee that in certain circumstances, for instance at the end of a specified policy term or on earlier death, an MVA will not be applied. There may be other circumstances depending on the type of policy: please refer to your original policy literature.
What factors can influence the decision to apply an MVA?
MVAs are applied when there are opportunities for some investors to take money out of the Offshore With-Profits Fund gaining an advantage against remaining investors.
In determining whether MVAs need to be applied, and at what level, market conditions are taken into account. MVAs will most likely be used following a sustained fall in investment markets. MVAs may also be applied when there is a significant difference between the bonuses and the total return on the underlying assets over the period of investment.
In addition, the amount taken from an Offshore With-Profits Fund in respect of your policy, including amounts withdrawn in the previous 12 months, may be considered.