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Inside Edge – Nick Bamford

Did the FSA convince Standard Life to review its stance on mutuality? We may never know. The FSA may well feel that if it is going to be criticised for the demise of one major mutual, Equitable Life, it had better ensure it is fireproof when it comes to a second mutual, Standard Life. That is not to say that Standard is in decline – it is not. It remains a financially strong organisation.

Sometimes it is much easier to write a negative story than a balanced report. You could be forgiven for believing that some reporters did not read the press release on Standard Life. Who reported the following information?

Companies Act accounts show a fund for future appropriations of £4.5bn for the year to November 15, 2003 (subject to final audit) compared with £3.2bn the previous year.

Statutory returns for the year to November 15, 2003 are expected to show available assets of £4.6bn compared with £4.2bn as at November 15, 2002.

Now, I am not an actuary (thank goodness) and I generally use a calculator to add two numbers but even I can spot that, by these two measures, Standard Life is financially stronger now than it was a little over a year ago.

Just what is the problem? Some will accuse the Standard Life board of arrogance for not having demutualised back in 2000, when its market value was realistically estimated to have been some £16bn. Today, some commentators think it is only worth £3bn-£4bn. So carpetbaggers now dominate the view of Standard Life.

The board is also accused of arrogance for remaining exposed to equities in its with profits fund and then cutting bonus rates. How stupid are these people? It is equity exposure that provides the best prospect for future bonuses. You cannot fairly criticise Standard Life for staying exposed to equities and then criticise it for reducing bonus rates. Just about everyone else has also cut bonus rates, Prudential being perhaps a noteworthy exception.

There is also a massive assumption that Standard Life will demutualise. Read the press release – it is one of the options being considered in a strategic review, not the only option.

I am not a betting man but, if I were, I think my money would be on demutualisation. But it raises a further interesting question which is who is making this decision? Is it the board of Standard Life or is it the board of the FSA? We really do need to be told.

Who might be affected by demutualisation? Well, it will not be the unit-linked policyholders, people who borrowed money from Standard Life Bank or their international customers. It will, of course, be the with-profits policyholders, the owners of Standard Life.

It looks as if demutualisation will result in a share issue rather than a cash payment. This will hopefully lead policyholders to retain their ownership in the longer term rather then selling out for a quick buck.

If you are such a policyholder, do not hold your breath as I suspect this will be a drawn-out process.

If Standard Life lowers the flag of mutuality, how many smaller, less financially strong firms will go the same way? To be fair, there are not many left but it will be interesting to see if the new FSA rules for judging financial strength contribute to their demise.

Nick Bamford is managing director of Informed Choice and chairman of Sofa


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