Whatever the final outcome of the Consumers' Association's challenge to the life industry over the distribution of orphan assets, there are a number of issues concerning mutuality and with-profits which must be urgently considered.
Indeed, the important que stion needs to be asked – is the concept of mutuality, in particular, with-profits, no longer appropriate or a viable proposition?
Axa argued that it needs to retain most of Equity & Law's orphan assets to meet its liabilities and, in the light of what has happened at Equit able Life, they may well be right.
The difficulty is in the calculations – actuaries have had a pretty poor track record of getting things right in recent years where with-profits funds are concerned.
There is no doubt that he who pays the piper calls the tune and that the actuaries came up with the figures Axa wanted them to produce.
Whoever the Equity & Law surpluses belong to, they do not belong to Axa, a proprietary company which acqui red them by taking over the mutual Equity & Law.
They belong to the current and past policyholders of Equity & Law. What Axa, and many other life companies, are doing is asset-stripping – very popular in the 70s and 80s when one company would take over another and raid the surpluses in the pension fund.
In many respects, the Lords' judgment which bro ught Equitable Life to its knees is at odds with the Axa High Court decision.
The ruling stated that Equitable could not cut the terminal bonus to pension policyholders who held valuable guaranteed annuities, to take account
of the cost of the guarantee, but must give those policyholders the same terminal bonus as others who did not enjoy the benefit of the guarantee.
In other words, the management and the appointed actuary did not have discretion to distribute the profits in the fund as they saw fit.
This resulted in one of the biggest inequities of all time since with-profits endowment policyholders derive no benefit from the guarantees offered to the with-profits pension policyholders – yet they were for ced to pay for them thr ough reduced bonuses.
But if actuaries do not have discretion to use surpluses in the with-profits fund as they see fit, why should they be allowed to use with-profits surpluses to fund loss-leader promotion of stakeholder pensions?
Or expansion into other areas of dubiously profitable business?
Or to fund a multitude of other activities which are of no benefit to existing with-profits policyholders at all?
Yet this is what the Axa High Court judgment apparently endorses.
When Standard Life spent many millions trying to develop an institutional fund management business it did not consult policyholders.Nor did it have any credible explanation when asked how doing so would benefit existing policyholders.
The same applies to the considerable sums of money spent on setting up its Hong Kong operation – policyholders were not consulted.
Moreover, as the Consu mers' Association has pointed out most forcefully in respect of the Prudential policyholders' legal challenge concerning ownership of the Pru's orphan assets: “The Pru was one of the biggest culprits in the huge pension misselling scandal, yet the Government and the regulators are allowing it to use the orphan assets to pay the vast bulk of its£2bn share of the compensation, rather than making its shareholders foot the bill.”
If the concept of mutuality is to mean anything, then the owners of mutuals, the policyholders, must have some say in the running of the company, including any distribution of orphan assets.
The Consumers' Asso ciation points out that negotiations between Axa and the regulator took place over two years with no policyholder representation at all. This cannot be right.
The Consumers' Asso ciation is therefore calling for a formal inq uiry to look at the concept of with-profits funds and to whom they belong.
Mutuality and sharing the benefits of with-profits funds must involve the policyholders. The life companies would argue that policyholders do not understand the concepts nor the thinking behind the actuaries' considerations.
This is probably true. Quite clearly, neither do the regulators. But since this is the case, the time has prob ably come to admit that mut uality has had its day and to wind up the with-profits funds before the management blows it all on some other madcap scheme.