#129 | PacLife’s PDX Press Release

Last week, Pacific Life released a statement declaring that the very first PDX Performance Factors had been announced – 2.46 for one policy and 4.18 for another. As the Pacific Life representative quoted in the statement says, those Performance Factors have the potential to deliver total credits for policyholders of 24.6% and 41.8%, respectively. These are gargantuan numbers and Pacific Life is taking this opportunity to crow about the potential upside for its policyholders. It seems like a great press release and something to celebrate, but it’s not. Not even close. In fact, it’s proof positive of PDX’s weaknesses and just how misunderstood the product really is, even by the company selling it.

First and foremost, let’s talk about disclosure. The Performance Factor is apparently so important that Pacific Life felt the need to do a press release celebrating its debut figures, yet they’ve done virtually no disclosure in product filings or illustrations about how it works or its key pricing inputs. The press release shows you just how little we know. It says the first factors are 2.46 and 4.18. So, how are we supposed to know if those are “fair” Performance Factors? Did they change from what was originally illustrated? Are they based on the same pricing inputs? How in the world are the advisors supposed to manage these policies without any way to interpret those numbers? Can you imagine having a conversation with a client about why they got what? The core problem with the Performance Factor is that it has certain charges but uncertain benefits. This press release doesn’t fix that problem – it highlights it.

As the PacLife representative in the press release states, policy charges “support” the Performance Factor. Early in the contract, before PacLife introduces a bunch of funny business into the formula, the math to determine the Performance Factor is fairly straightforward. A Performance Factor of 2 means that the policy charges used to support the PF equal 4.1%, which is the product option budget (at least, that’s what it was at issue). The charges double the option budget and therefore the returns are also doubled (PF = 2). Makes sense. Using that math, you can translate the Performance Factors in the press release to the policy charges that they imply – 2.46 equates to charges of 6% of Account Value and 4.18 equates to charges of 13% of Account Value. The Performance Factors are gargantuan because the policy charges used to support them are also gargantuan.

These policyholders are gambling 6% and 13% of their account values, respectively, for a shot at more upside. This is an immense amount of risk and leverage for a product that is supposed to be about protection from downside risk and is not a security. It is a clear example of just how far we’ve strayed, as an industry, from our moorings. We used to sell Indexed UL as “zero is your hero.” What this press release shows is that a better slogan might be “come and gamble a significant chunk of your account value on our proprietary, undisclosed, non-transparent, options-based roulette wheel.” I know, I know. It just doesn’t have the same ring to it, does it? I’ll work on it.

A lot of people have asked me if this press release changes my opinion of the product. Given that my opinion of PDX has always been that it is complex, inadequately disclosed and highly leveraged, the answer is that this press release only serves to cement my opinion. And I’m genuinely disappointed about that. PacLife has historically done better. The press release that Pacific Life should have released was that it was disclosing the formula and pricing inputs for the Performance Factor on each client’s annual statement so that they could clearly see where they were taking risk and how they might be rewarded for it, which would facilitate productive conversations with their agents and advisors about how best to manage their policy for the long haul. Now that would change my opinion of PDX. But judging by the self-congratulatory and short-sighted nature of this press release, it looks like things aren’t shifting any time soon.

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