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&#39If a 100/0 fund replaced the 90/10 fund, there would be concern about where capital strength was coming from&#39

Life offices have had their feathers ruffled by suggestions that Sandler&#39s with-profits proposals – which would see funds ringfenced to prevent them being used to cross-subsidise other business areas – could become mandatory.

Prudential UK chief executive Mark Wood accepts that the suggestion will have people looking at the Pru but says this is merely because it has the biggest with-profits fund in the UK. Its fund was last valued at around £70bn and its orphan estate was valued at between £6bn and £8bn at the end of 2001. No other company is so closely associated with traditional with-profits.

The FSA is keen to stress that DP20 is a discussion paper and not a consultation paper. When the paper was issued, FSA managing director John Tiner said he was keen to hear opinions about the Sandler model becoming mand-atory, accepting that such a move could have significant implications for with-profits offices, particularly the redistribution of orphan assets, the supply of capital for new business and what happens to traditional-style with-profits funds when they are closed.

Wood is clearly cool about being forced to move to a 100/0 structure. Unlike Norwich Union and Legal & General, which say they will resist any move to stop them selling traditional with-profits, Wood takes a more softly-softly approach. He broadly welcomes the Sandler approach while questioning the need to ringfence funds.

Wood says: “We absolutely understand the attraction of the 100/0 structure but consider that, for a strong and well-regulated fund, where the principles of financial management are publicly stated, the advantages can easily be overstated.”

However, Wood says he feels that many of Sandler&#39s reforms can be incorporated within the existing structure. For example, he believes an explicit charging structure could be attached to a 90/10 fund. But he does not rule out a restructure. “We are examining the options for moving to a 100/0 structure,” he says.

Wood says the Pru already has structures in place which would give it a headstart in creating a new-style fund. He points out that Pru&#39s with-profits offering in the French market and the international with-profits bond domiciled in Dublin both conform to the more modern ringfenced structure.

But Wood says he remains to be convinced that any such move would be in consumers&#39 best interests. “If a 100/0 fund replaced the 90/10 fund, then there would be concern about where the capital strength was coming from,” he says.

He adds that this is a concern he has heard IFAs express.

Does Wood think the FSA will go so far as to require the Sandlerisation of all future with-profits business? “I think it is possible but an unlikely outcome,” he says.

If it does happen, it would have implications for Pru&#39s famed orphan assets. The company has been in discussions with the regulator on the issue since 1996 although it stresses that these concern attribution rather than distribution.

“There is no question of being forced to distribute the inherited estate,” he says, adding that it would be many years before it became a pressing issue.

Wood believes the 340,000 people who currently have a Pru with-profits bond should continue to benefit from the cushioning strength provided by the orphan assets.

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