With-profit bonds have had a difficult time recently. In response to stock market uncertainty and what it calls "bad press" for this type of investment product, Hibernian Life & Pensions has published an information document explaining the terms and conditions of its with-profit bond.

With-profit bonds are a capital-guaranteed investment, which work by smoothing the returns on the fund over the term of the investment, typically at least 10 years. Life assurance companies agree to pay a set annual bonus, declared each year. Some of the returns in good years are held back to compensate for the bad years.

Any remaining profits in the fund are awarded in the form of a terminal bonus on maturity. If the annual bonuses awarded over the course of the investment exceed the market performance of the fund, as they have done in the past three years, investors could be disappointed with the size of their terminal bonus, if they get one at all.

Hibernian's with-profit charter, which contains similar information to other brochures for with-profit bonds, is about "opening up the black box and seeing what's working underneath", says Mr Grant Barrans, managing director of Hibernian Life & Pensions. "When things are going fine, nobody wants to know the details," he notes.

The charter sets out the general principles on annual and terminal bonuses, and a type of exit penalty known as a market value adjustment (MVA).

MVAs, which recently have been in the order of 15 per cent, are designed to protect investors from a stream of early encashments during poor market runs. The possibility the life company could impose one at any time during the investment term can make with-profits products unattractive to investors who are looking for a little more flexibility.

One important way of reassuring investors in life assurance companies is to guarantee protection from any solvency concerns the company might have. The mutual company Equitable Life, which has 20,000 members in Ireland, has made a series of cuts to bonuses on its standard with-profit policies. The interim rate of return for 2002 is zero.

Last month, Equitable Life's chief executive, Mr Charles Thomson, also wrote to holders of its with-profit annuities saying they would face a cut in the value of their annuity by up to 20 per cent on the anniversary of their policy, after February 1st, 2003. The company will reduce the income payment again in 2004 to regain any overpayment that may still apply. From the beginning of this month, interim bonuses will be zero, in line with standard with-profit policies.

With-profit annuities provide holders with an income during retirement. Unlike standard annuities, with-profit annuities remain invested in the society's with-profits fund and pay an annual income based on the fund's growth. "With-profits arose traditionally from a mutual environment. You were effectively investing in the company," explains Mr Barrans at Hibernian.

Losses at other firms have not been over concerns with the nature of with-profit products, he stresses, but are linked to generally poor investment and business performance.

Hibernian's with-profit charter takes pains to emphasise that its with-profit fund is independent of all other Hibernian Life & Pensions business activity. In other words, it is ring-fenced so that policyholders are not exposed to any business risks to which the company may in the future be exposed. "If we, the company, are making a loss, we cannot dip into the fund," says Mr Barrans.

The charter also makes a commitment to disclose the free asset ratio of the fund every six months, in June and December. This ratio shows by how much the assets of the fund exceed its liabilities, or vice versa. According to Hibernian, it is a good indicator of the financial strength of the fund, over and above the solvency margin required by Government legislation. The charter states that, at the end of June and December, the exact split between the asset classes in Hibernian's with-profit bond will be posted on www.hibernian.ie.