13 December 2007
As the Financial Services Authority (FSA) announces a major decision affecting how much savers receive from the £14 billion surplus in with-profits funds at Prudential and Norwich Union, Peter Vicary-Smith, Chief Executive, Which?, comments:
“This is the worst possible advert for the insurance industry at a time when confidence in the financial services industry is at an all-time low.
“The FSA has once again failed to address the needs of policyholders and sided with those it is meant to regulate.
“Their decision to allow money in inherited estates* to be used to subsidise new business or pay shareholder tax bills will result in five million Norwich Union and Prudential policyholders losing out on thousands of pounds each.
“Instead of treating customers fairly, Norwich Union and Prudential are trying to get away with a smash and grab raid on billions of pounds that should go to policyholders. Their shareholders must think that Christmas has come early.
“In the light of today’s decision, we will be exploring all legal avenues open to us that may help to protect policyholders."
-Ends-
http://www.fsa.gov.uk/pubs/other/reattribution_letter.pdf
* The inherited estate is the term used to describe the surplus assets in a with-profits fund which have built up over many years. With-profits funds operate a technique known as ‘smoothing’. This means that some of the return from the investments in the fund is kept back in good years and added back to top-up returns during periods of poor performance. “Inherited estates” largely build up because companies hold back too much money, short changing previous generations of policyholders. FSA rules require insurers to nominate a policyholder advocate to negotiate on policyholders behalf about how the inherited estates are 'reattributed' (divided) between policyholders and shareholders.
Which? has long maintained that any reattribution of inherited estates should be on a 90:10 basis in favour of the policyholder. This is because the inherited estate is part of a fund where the rules state that when the money is distributed policyholders receive 90% of the return and shareholders 10%.
In October, Which? wrote to Hector Sants, chief executive of the FSA, expressing concern that the Conduct of Business rules allow companies too much leeway to use the inherited estate in ways which do not benefit policyholders. These include paying shareholder tax bills, subsidising new business and paying mis-selling claims. Which? believes that the FSA’s rules result in unfairness to policyholders and are undermining the ability of a Policyholder advocate to secure a good deal.
There is around £14 billion at stake in the inherited estates of Prudential and Norwich Union. Over 5 million people will be affected by the outcome of these deals.
| Amount policyholders would receive from inherited estates | |||
|---|---|---|---|
| With-Profits fund | Number of eligible policyholders | Size of inherited estate | Average per policyholder if they received 90% |
| Norwich Union -CGNU Life and CULAC | 1.1 million | £5.2 billion | ~ £4,000 |
| Prudential | 4.4 million | £8.6 billion | ~ £1,750 |
Which? went to court in 2000 to try to prevent AXA’s deal to divide unfairly its £1.7bn inherited estate between policyholders and shareholders. We thought this was a very bad deal for policyholders who received just 31% of the inherited estate and lost out on over £1 billion compared to a situation where they received 90%.
