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NU is sticking with tradition on with-profits

Other providers are offering stakeholder with-profits products but NU will crosssubsidise its bonus rate, presently 5.75 per cent, from its existing fund.

The prospect of one group of policyholders potentially subsidising another is not problematic for NU, which says the likelihood of the guarantees being called upon is slim.

DSS ringfencing rules mean traditional with-profits policyholders will never get any money from the stakeholder fund in return for any subsidy they provide. But NU argues that the benefit in growing the business into the stakeholder market offsets any potential loss that the traditional with-profits policyholders may incur.

NU&#39s duty to its policyholders is to have regard to their reasonable expectations. It has decided it is in the greater interests of traditional with-profits policyholders to be with a company which is succeeding in stakeholder but this interpretation is not held across the industry.

Legal & General pension strategy director Adrian Boulding says: “We looked at with-profits for stakeholder and the issue of whether you can crosssubsidise. It is very plainly a one-way valve. To have a one-way money flow contravenes the reasonable expectations of policyholders in the old with-profits fund.”

But NU risk actuary Tony Horn says: “If we become a major provider for stakeholder, we enhance the brand and the benefit for the existing fund is that costs would reduce. There is a cost in guaranteeing the returns on the other fund but it is offset by being a bigger player.”

The FSA sees no conflict between cross-subsidising one fund with another if it helps to grow the overall business.

Spokeswoman Jackie Blyth says: “Companies can use free assets to support new business growth to maintain market position and strength.”

The Consumers&#39 Association, which has been critical of the whole with-profits proposition, says it also has reservations over the cross-subsidy structure. It says the complexity of the cross-subsidy underlines its principal argument over with-profits.

Principal researcher Teresa Fritz says: “Companies are running stakeholder products as a loss-leader but I would not want to see them propped up by orphan assets. It appears Norwich Union is giving guarantees to the detriment of loyal policyholders. Stakeholder is supposed to be simple but I do not think many policyholders will understand what all this means.”

Analyst Ned Cazalet does not believe the new stakeholder products labelled as with-profits are actually with-profits. He says: “It is not with-profits as we know it, it is a smoothed equity fund. With-profits are an historical accident. You would not set one up today, as where will the capital come from?”

Which brings us back to NU trying to give more of the features of a traditional with-profits fund than other providers, namely some sort of guaranteed return.

Wentworth Rose managing director Philip Rose says: “I applaud Norwich Union for grasping the nettle of with-profits for stakeholder. Whatever else is said about with-profits, it is still popular for low-income customers. How can companies play in the stakeholder market if they are not prepared to make this sort of commitment?”

Horn says: “If we did not have stakeholder with-profits funds, then the whole stakeholder proposition cannot work. This structure is better for Norwich Union, the industry and the Government.”


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