Glossary · UK
What is Market Value Reduction (MVR)?
An exit penalty an insurer can apply to a with-profits policy if it is cashed in before the end of its term during a period when investment markets have performed poorly, to protect the interests of other policyholders remaining in the fund.
Full Definition
A Market Value Reduction (MVR), sometimes called a Market Value Adjustment, is a deduction an insurer can apply when a policyholder withdraws money from a with-profits fund earlier than the policy's normal maturity date, guaranteed exit point, or other agreed event, and the fund's underlying investments have not performed well enough recently to support the smoothed bonus value already credited to the policy. Because with-profits funds deliberately smooth returns -- holding back some gains in good years to support bonuses in poor ones -- a policyholder cashing in during a downturn could otherwise take out more than their fair share of the fund's actual underlying value, at the expense of policyholders who remain invested. An MVR corrects for this by reducing the payout to something closer to the fund's true current asset value. Insurers generally will not apply an MVR if a policy is held to its normal maturity date, a pre-agreed guaranteed date, or in the event of the policyholder's death, and MVRs are typically only used during periods of poor investment performance rather than as a routine charge. Because whether an MVR applies -- and how large it is -- depends on the insurer's own reserving position and current market conditions rather than a fixed published formula, policyholders considering an early withdrawal from a with-profits bond or pension should always ask the provider for an up-to-date illustration showing the effect of any MVR before deciding whether to proceed, since the reduction can sometimes be substantial enough to make waiting until a guaranteed date clearly worthwhile.