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Point of no returns

An advantage of working from home is that no one is looking at you as you work away, an advantage when you end up spilling a bowl of muesli all over your keyboard and trousers as I did when I read that Prudential would not be returning any of its £8.7bn inherited estate to policyholders and shareholders.

The company, which had wanted to divvy up its estate for the best part of a decade, now says an “extensive assessment” has concluded that maintaining the current operating model for its with-profits fund is in the “best long-term interest” of current and future policyholders.

Prudential UK & Europe chief executive Nick Prettejohn was quoted as saying: “Our overriding priority is to maintain the long-term financial security of the with-profits fund. The whole of the inherited estate is required and it will remain as the working capital of Prudential’s with-profits sub-fund, helping to support continued superior investment performance, security and the ongoing financial strength of the fund for the benefit of current and future policyholders.”

That may well be the case although you have to wonder how it is the Pru appears to have only just arrived at this conclusion.

While the company worked hard to persuade us it would mean policy-holders continue to benefit from its extraordinarily good long-term fund performance, the fact remains that many will see this as bad news.

Back in 2000, even under Axa’s incredibly mean and disadvantageous deal, whereby policyholders only received 31 per cent of its inherited estate, the company still stumped up £300m in cash to those who wanted an immediate payment, with other policies having their future values beefed up.

Based on that, many Pru policyholders would have been hoping for windfalls running into thousands of pounds each.

Inevitably, there will be conspiracy theories as to why the Pru pulled the plug on a potential reattribution of these assets. Some will point to the kicking given by the recent Treasury select committee report into Prudential’s use of £1.6bn from its inherited estate to pay off misselling compensation claims.

The committee said this was a cost the shareholders should bear and also criticised the use of inherited estates to fund new business, saying it caused particular problems because shareholders have the ultimate call on how the money is used.

Personally, I am not convinced by this.

There will be others who point to the incredibly protracted negotiations taking place between Aviva and its policyholder advocate Clare Spottiswoode. She has been charged with making sure that Norwich Union policyholders get a fair deal when NU’s £5.5bn inherited estate is divvied out, perhaps next year.

In one of the interesting sidelines to the discussions on the Treasury select committee, it was notable that both Aviva and Spottiswoode spoke in coded language about the differences between each other in terms of how this money should be distributed.

Reading between the lines, you can smell NU’s frustration at how long this has taken. But again, my guess is that the Pru, having a much better understanding of what the process involves, could have avoided some of the worst pitfalls.

So what is the main reason for the Prudential’s remarkable about-turn? Well, as we know, the inherited estate represents 11 per cent of the with-profits fund’s total size of £79bn at the end of December although that amount is likely to have shrunk in the past few months as UK and world stock markets have fallen.

It is this recent stock-market fall that has frightened Prudential. Not because it cannot meet policyholders’ reasonable expectations as their policies mature in the next year or so. That is an FSA requirement which the Pru is highly unlikely to come close to breaching.

No, my own guess is that Prudential looked at what happened at Standard Life five years ago, when the Scottish insurer was forced by the FSA to sell off some £7.5bn of shares held in its with-profits fund and reinvest them in shares in order to keep meeting its solvency requirements.

The effect of this selloff for Standard Life’s long-term fund performance has been – and continues to be – devastating.

Equally, this tells us something else. While the inherited assets will continue to “support the fund’s superior investment performance, security and the ongoing financial strength”, they do so at a time when stockmarkets are in massive turmoil.

At a time like this, I suspect that Prudential probably felt that it was not a clever time to go about removing such a vital prop to its with-profits fund, one which almost alone among most insurers with similar funds, it is still keen to attract more investors into.

If I am right, the market falls we have seen in recent weeks are a sign of worse to come for the next year or two at least. Be afraid.

Nic Cicutti can be contacted at


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