The whole point of mutuality is that the members are supposed to have a say and take part in major decision-making within the comp-any. Sadly, far too few members of mutuals, whether it is an insurance company or building society, take an interest in the affairs of the business, unless they can see some sort of cash windfall from demutalisation.
The debate about whether with-profits funds ought to be wound up is somewhat academic since the FSA only has powers to force a wind-up of the whole company if there were a threat to consumers. But there is no doubt that members of mutuals could be in a position to force the management's hand on this.
If the past track record of the industry is anything to go by, there is little doubt that many with-profits policyholders would be better off if the with-profits fund was ringfenced and unitised.
Consultant Ned Cazalet, rightly pointed out that this was the fairest solution to the Equitable Life debacle. The Equitable management chose not to do this as it would remove its ability to manipulate the funds.
It is an outrage that for years life companies have plundered the with-profits fund to finance their mistakes, such as compensation for misselling pensions and mortgage-linked endowments, to pay for fat-cat salaries or to subsidise other products.
All through the 1990s, quoted life companies were raiding the “orphan assets”, much of which was profits from earlier life business which should have been attributed to the with-profits fund. The 1989 AMP takeover of Pearl (now closed to new business) is perhaps the most shocking example of “orphan assets” plunder. AMP bought Pearl for £1.2bn, secure in the knowledge that the Department of Trade and Industry was about to recommend that “orphan assets” could be paid out to shareholders. Having paid a derisory £1.2bn for Pearl, AMP applied to have orphan assets worth £918m released to the shareholders – none other than AMP – along with a further £42m in future surpluses from the with-profits business. This is asset-stripping at an astonishing level.
The trouble is that life company management has often been incompetent, if not downright negligent. Equitable Life is a case in point. Until relatively recently, Equitable Life could not tell a customer how many policies they had with the company, because the system relied on policy numbers rather than on customers. Equitable was not alone in this.
Moreover, incompetent management, rather than unexpected outside events such as a stockmarket crash, has been firmly identified as the cause of most life company failures.
In a recent academic study by Simon Ashby and Paul Sharma, of the FSA, and William McDonnell, of Deloitte & Touche, their report said “the root of most insurance company failures is management, and typically, poor management”.
It said: “Poor management can leave an insurance company vulnerable to external events such as an adverse change in the prevailing social or economic climate. Poor management can also lead to more intermediate causes such as inadequate internal processes and systems, that may, in turn, result in inappropriate risk decisions that further increase a firm's vulnerability to failure.”
Are these the sort of people that we want to entrust with our life savings? And if we do, are we happy to let them decide how much of our own money they will pay out on a with-profits investment?
The answer should, in most cases, be a firm no. While the policyholders of quoted life companies can only vote with their feet and take their business elsewhere, assuming that the company has not locked them in with hefty penalties, members of mutuals do have a remedy.
Instead of fussing about demutualisation, they should be using their mutual status to force the management to ringfence and unitise the with-profits fund. This is the only way that they will get a fair deal.