With-profits, a concept roundly attacked in recent months, could come to the aid of victims of severe injury.
Personal injury lawyers usually agree on a lump-sum payment when settling claims. But they can opt for a structured settlement, where an annuity is purchased to provide the victim with an income. Unlike conventional annuities, the income is tax-free.
Both parties have to agree on this course of action, which must be approved by a judge. Judges have no power to order a structured settlement. However, the Lord Chancellor's Department is in consultation with life offices and specialist IFAs, as well as lawyers, on the form that damages in personal injury cases could take in future.
The advantage of a structured settlement is that the damages cannot be frittered away and will continue to provide income for the lifetime of the injured person. An annuity can more appropriately replicate the victim's income stream before the accident. In the US, where personal injury litigation has a much higher profile, structured settlements are the norm.
However, in recent years, the popularity of structured settlements has declined in line with falling annuity rates. Currently, structured settlements are used for only 1 per cent of the £163.5bn in personal liability claims settled each year.
Life offices that write annuities for structured settlements include Axa Sun Life, National Farmers Union Mutual Insurance Society, Scottish Widows, Standard Life and Windsor Life.
Windsor Life is run as a closed book with new business restricted to structured settlements. After consultation with the Inland Revenue, Windsor Life has recently launched a with-profits annuity which can offer more attractive rates of return than the conventional product. Whereas indexed annuities have an uplift of 2 to 3 per cent, Windsor Life's with-profits annuity has a 4 per cent bonus applied for this year.
The assessment of damages can be done on a top-down basis, which involves calculating how much a certain purchase price will fetch in terms of income. More usually, the assessment will be on a bottom-up basis. Following an assessment by occupational therapists of the level of income required by the injured person, the appointed IFA approaches product providers to find out the payment needed to secure that income.
Windsor Life believes other providers are preparing similar products for the market although Standard Life, Scottish Widows and Axa Sun Life, the obvious contenders, all say they have no plans to launch an equivalent product. But IFA Chase de Vere partner Peter Jackson would like to see competition, believing monopoly in this sector to be unhealthy.
IFA Frenkel Topping compliance officer Richard Petrie believes Windsor Life's initiative will reinvigorate interest in the structured settlement but he says the appropriateness of with-profits would, as always, depend on the individual's attitude to risk.
The bulk of personal injury cases relate to medical negligence during the birth process and severe road traffic accidents. The average purchase price for a structured settlement annuity tends to be around £163.500,000. Axa Sun Life marketing manager Keith Middleton says Axa has quoted for cases as low as £163.25,000 although that is unusual. Government bodies, such as the NHS and Ministry of Defence, tend to self-fund but still secure the services of a specialist IFA to ascertain the levels that would be paid on the open market for presentation to the court.
This specialised sector of the market is dominated by a handful of IFAs. Structured settlement annuities were introduced by Frenkel Topping in 1989. What do IFAs need to operate in this potentially growing arena?
Petrie says IFAs need the approval of the Public Trust Office. Jackson suggests IFAs need to have specialist skills and knowledge of the legal system together with honed client skills to deal with traumatised clients from a variety of backgrounds. IFAs should also have taxation and trust qualifications, he adds.
Both IFAs believe this is a growing market that will be given new life by Windsor's launch. Jackson says: “Structured settlements have lost their gloss recently but this will revive interest.”
The possibility of approving structured settlement annuities that would again be competitive has been welcomed by the legal profession. Master at the Court of Protection Denzil Lush has welcomed the introduction of the product.
But lawyers might need convincing of the suitability of with-profits. Jackson says this is where the benefits of independent financial advice will show through. Windsor Life product actuary Stuart Wilkinson admits: “It is a good product but poor timing.”
The Annuity Bureau head of marketing Dave Marlow says, as Windsor Life is not a regular life office in terms of its reporting, it is difficult to assess the financial health of the fund. The fact that Windsor does not offer annuities on the open market also makes it difficult to assess the product's competitiveness, which is complicated by the lack of comparable products from other providers.
As the Windsor Life structured settlement annuity is attached to a closed with-profits fund, it would be managed on a more conservative basis.
Lack of new business could restrict cashflow, resulting in an asset allocation with a higher fixed-interest and lower equity component than would otherwise be the case.
Given the particular requirements of the severely injured and disabled, the financial advice and fact-finding has to be careful and painstaking. Jackson says it is important to assess each case individually. The portfolio would need to include the usual variety of deposits, National Savings and collective investments, configured in such a way as to provide for the needs of those affected.