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Mandatory adoption plan could see orphans rehomed

The FSA has put forward proposals which would modernise with-profits

and could force some of the biggest life companies into drastic


In Discussion Paper 20, Issues for With-Profits Aris-ing from the

Sandler Review, the regulator proposes the mandatory adoption of a

new model for all future with-profits business.

This would cause the disappearance of the traditional 90/10 model of

with-profits, where policyholders and shareholders both have

interests in a fund supported by an inherited estate.

The FSA admits this would lead to the prospect of existing

policyholders benefiting from a windfall bonanza as orphan assets are


But it stresses that it is an enforcer, not a legislator, and any

move to make Sandler-style with-profits compulsory across the market

would have to come from the Government.

Recent focus has fallen on Sandler&#39s proposals for a simple suite of

products but there has always been concern in the industry that his

ideas would spread across the product range. Of course, with-profits

was one of the original reasons for the Sandler review, after Paul

Myners&#39 earlier review of institutional investment stepped outside

its remit to criticise the product.

KPMG actuarial partner John Jenkins points out that while a few

companies still operate on the 90/10 model, many have already moved

over to the new charges-less-expenses model. However, the biggest

players in the market – Prudential, Norwich Union, Legal &

General and Standard Life – continue to write with-profits on the old


NU senior actuary John Lister says his company will strenuously

resist anything that stops it from continuing to offer traditional

with-profits while cautiously expressing interest in the new product

if the price cap makes it commercially viable. He says the FSA should

think carefully about where the capital for the new products would

come from.

NU and L&G believe consumers should be left with the choice about

which model is appropriate. Here, they have the support of IFAs.

Wentworth Rose chief executive Philip Rose points out that

Cat-standard Isas were introduced as an option. “This is getting a

bit prescriptive. Surely, it is up to the public to decide whether

something is competitive?” he asks.

NU has already said it is looking into distributing its orphan assets

but that no announcements should be expected until the end of 2004.

L&G believes the estate is essential for the proper working of

its fund. Standard Life says, as a mutual, its orphan estate is owned

by policyholders and claims its origins derive from its mutualisation

in 1925.

But all eyes will be on Prudential. The company has long been in

discussion with regulators about its orphan assets but is keeping its

head down and was unavailable for comment about these latest


Mandatory Sandlerisation, if enacted, would have a significant impact

on Prudential.Rose says: “Prudential still has the financial strength

that many of its competitors have not any more. It is still easy to

recommend, partly because of the orphan assets that sit in the fund

and the cushion they provide.”

L&G head of public relations John Morgan suggests that some of

Sandler&#39s proposals look a bit dated, given what has happened in

world stockmarkets in the intervening period. “You don&#39t need to kill

with-profits to cure it,” he says.

Skandia head of UK marketing Peter Jordan suggests that a few

companies would be quite pleased if the FSA insisted that all

with-profits business had to be on the new model, as it would allow

them to start with a clean sheet after the recent problems affecting

the product.

He says: “This would force far more honesty in with-profits and the

products would have to be accurately priced.”

The past closure of with-profits funds has benefited companies such

as Royal & Sun Alliance, as it has allowed the fund to become

more stable and conservatively managed as liabilities become more

fixed and troublesome issues surrounding equity weightings are more

easily resolved.

But The Abacus director Philip Martin asks what would be put in place

to protect the interests of the millions of policyholders who would

find themselves in closed funds.

Last summer, Scottish Widows anticipated Sandler&#39s review by offering

a new ringfenced with-profits fund, with Scottish Equitable following

later in the year.

The Abbey National stable of life companies has all closed its

with-profits funds to new business but it promises to offer a

Sandler-style ringfenced smoothed product later this year.

Standard Life, NU and CIS have new-style with-profits in the form of

ringfenced stake-holder with-profits funds.

Rose says: “With companies as pushed as these, I think that windfalls

would be very unlikely. Scottish Widows must be ruing the amount it

paid out on demutualisation.”

How likely is such a drastic reshaping of with-profits, particularly

with life company solvency pressed as it is at present? Some industry

insiders suggest that this discussion paper is actually a bit of FSA


They point out that issuing a discussion paper and not a consultation

paper on a Sandler proposal will result in outrage from the biggest

names, so the with-profits proposals could be fatally undermined.


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