Which statement accurately describes with-profits and unit-linked funds?

• A. With-profits funds do not offer smoothing or guarantees; unit-linked funds do.
• B. Unit-linked funds include smoothing and guarantees; with-profits reflect market exposure.
• C. With-profits funds typically offer smoothing and guarantees through the insurer; unit-linked funds reflect underlying investments with direct market exposure.
• D. Both fund types are identical in risk and return.

Answer: (C)

The distinction being tested is how risk and returns are handled in two pension fund types. With-profits funds are backed by the insurer and use smoothing to dampen volatility, often adding bonuses and sometimes offering guarantees within the policy. This means the insurer helps smooth the path of returns and can provide a level of protection or guarantees through the policy. Unit-linked funds, on the other hand, pass investment risk to the policyholder: the value moves with the underlying assets, and there is no smoothing or insurer-provided guarantees. The policyholder owns units in the fund, so returns reflect market performance directly.

So the accurate description is that with-profits provide smoothing and guarantees via the insurer, while unit-linked funds reflect underlying investments with direct market exposure.