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Asset Share- smoothing cost

R

Rajat gupta

Ton up Member
Hi,

Can someone help me in understanding if the smoothing cost is charged to asset share if company is paying either equal to or lower than asset share but never higher?

Regards,
Rajat
 
The charge that may be made to asset shares to cover the cost of smoothing relates to investment smoothing. If a company is only ever paying asset share or lower, this is not smoothing in that sense. Investment smoothing means paying more than asset share when investment performance has been poor (and vice versa). So in the situation you describe the company is not performing investment smoothing and hence it wouldn't be charged for.

Furthermore, if the company never pays out more than asset share, the estate is not providing any support - so there is no justification for taking charges from asset shares as compensation for such support.

If a company is only ever paying out the (unsmoothed) asset share, the p/hs are not benefitting from any smoothing at all - and it is therefore questionable as to why such a product would be issued: why not just offer a unit-linked contract (with guarantees)?

If a company consistently pays out less than asset share, there may well be issues relating to treating customers fairly.
 
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