The ripples caused by the High Court judgment in the Axa orphan assets' case will be felt for some time. Estimates of the extent of orphan assets across the industry range from £20bn to £30bn and the decision is likely to be a precedent for future distribution across a range of companies.
The Consumers' Association is concerned that such distributions will mean a missed opportunity for mortgage endowment policyholders facing shortfalls.
In a paper written in response to the FSA's mortgage endowment review the CA calls on the FSA to reaffirm the principle of distribution of orphan assets distributed 90:10 in favour of policyholders. It says the FSA disregarded this when it supported the Axa decision.
The CA paper says: “One of the issues that we found most hard to reconcile with the FSA's stated objective of protecting consumers is why the FSA is not doing everything to ensure a successful resolution of the orphan assets in policyholders' favour, particularly at a time when millions of policyholders have to find extra money to ensure their mortgage is paid off.”
The Axa decision means policyholders will receive £400 cash and a 3 per cent increase in the maturity value of their policies. Part of the money will come from its orphan asset estate and part from Axa's shareholder reserves in return for policyholders giving up any claim on the orphan assets in the future.
The CA draws parallels between the extent of the pension misselling scandal and the distribution of orphan assets at a time of widespread endowment policy shortfall projections.
CA senior policy adviser Mick McAteer says: “If the Axa deal is repeated across the industry, then up to £18bn will be lost to policyholders, making a bigger loss to consumers than the £13.5bn deficit in the pension misselling scandal.”
Sedgwick Independent Financial Consultants mortgage consultant Steve Smith says: “I was disappointed with the Axa decision because, in principle, if they were anybody's funds they were policyholders' funds. But it muddies the waters to look at these two issues together.”
Smith says: “The orphan assets and the mortgage endowment review are two separate issues. But the endowment shortfall projections are not about past performance, they are about estimated future performance. The problem is arising because we are entering a lower interest era. You could say the problem lies with the fund make-up of endowment policies, which has to stick with gilts and fixed-interest products rather than more adventurous investments.”
The CA paper points out that, because of the stacking of charges at the beginning of endowment policies, policyholders have not had the benefit of the high-return years.
It also says: “If endowment policies were not characterised by high up-front charges, then the number of policyholders sitting on a redressable loss would be substantially reduced.”
Madison Monetary Marketing managing director Mark Howard believes the Axa decision did not set a precedent. He argues that United Friendly was the first to get DTI appr-oval in the early 90s for its asset allocation.
Howard says: “The precedent is already set. While the FSA might push companies on their moral obligations, to do it legally would be very hard.”
The FSA is not about to make such a U-turn and says each case must be looked at on its merits. Spokeswoman Jackie Blyth says: “The orphan assets cannot be distributed to shareholders. Under actuarial assumptions, they will not be paid out for at least another 30 years. We went along with the court's and independent actuary's view.”
McAteer says: “We must find a way to involve policyholders in representations. policyholders were completely excluded from negotiations over the Axa orphan assets. We want to see a public inquiry into with-profits and how orphan assets are distributed.”
There are two clearly separate but related issues that the CA understandably wants to have considered together.
Axa is being criticised for not paying out more to policyholders at a time when Equitable Life is being criticised for distributing its orphan assets to policyholders and not keeping them in reserve. Clearly, the issue will run and run.