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Which? backs inherited estates inquiry

Treasury Select Committee announces probe

Which? has welcomed news that MPs are to probe the billions of pounds worth of ‘inherited estates’ held by life assurance companies.

The Treasury Select Committee has announced it is to hold an inquiry into the cash that has built up in with-profits funds.

Up to 20 million consumers are believed to have a policy in some form of with-profits fund – for example, an endowment, a personal or employer’s pension, or an annuity.

With-profits funds adopt a process 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.

But ‘inherited estates’ then build up because companies often hold back too much money, short-changing previous generations of policyholders.

Financial Services Authority

Government policy is that, as a rule, inherited estates should be allocated 90% to policyholders and 10% to shareholders.

But companies don’t have to follow this rule.

Instead, the Financial Services Authority (FSA) allows firms to use money from the inherited estate for a variety of purposes – including paying shareholders’ tax bills and paying compensation to victims of mis-selling.

Norwich Union and Prudential are two of the firms that have held back too much over the years and have built up £14 billion in inherited estates between them.

‘Inadequate regulation’

Earlier this month, Norwich Union announced that it would distribute £2.3 billion of its surplus funds, with 90% – £2.1 billion – going to its with-profits customers and 10% – £200 million – being given to shareholders.

It has decided to phase the payment of this money over three years meaning thousands of Norwich Union’s most loyal and longstanding customers whose policies mature before 1 January 2010 won’t receive the full amount.

There is still no agreement on how the remaining £3.2 billion in Norwich Union’s inherited estate will be distributed.

Which? Chief Executive Peter Vicary-Smith said: ‘Whilst the committee’s inquiry is a positive move for all with-profits policyholders, it reflects badly on both Norwich Union and the FSA that it should come to this. 

‘Norwich Union must act with integrity and stop hiding behind the FSA’s inadequate regulation of inherited estates as an excuse for denying its policyholders a fair share of this money.’

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