With-profits funds explained The 'inherited estate' problem
There's over £15 billion in 'inherited estates', but is it being used to benefit policyholders?
Where did the money come from?
Some with-profits funds have built up money over time which is surplus to the amount needed to meet policyholder commitments and other obligations. This money is referred to as the ‘inherited estate’. In many cases it was built up because companies held back too much money from policyholders during the ‘smoothing’ process.
Aviva (formally Norwich Union), Prudential and Legal & General are among the companies who have significant ‘inherited estates’. Between them they built up £15 billion in these funds.
What's the problem?
Companies say they use the money to ensure the stability of the funds, but in reality they don't have to use this money in policyholders’ interests. Instead they can take money from the inherited estate to pay shareholders’ tax bills, subsidise new business and even pay compensation when the company has broken the rules and mis-sold a policy.
Billions of pounds have been taken from the inherited estates for reasons like these. For example, Prudential used £1.6 billion pounds to pay compensation for mis-selling, while Aviva used £202 million and set aside a further £64 million for this purpose.
What can be done?
We want the Financial Services Authority to tighten up its regulations so that money in the inherited estate is only be used for purposes that benefit policyholders.
These changes could reap rewards for policyholders as they will free up the money which had been set aside. Any money in the fund that is deemed to be ‘excess surplus’ has to be paid out, so policyholders may see bonus payments as a result of any rule changes.
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