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Sailing close to the windfall

After many months of speculation, Scottish Life announ ced in October it had agreed, subject to member, regulatory and Court of Session approval, to the transfer of its business to the Royal London Group.

On first viewing, the proposal looked attractive. Mem bers would receive £500 in compensation for loss of membership rights and with-profits policyholders would receive additional reversionary and ter minal bonuses both.

The reaction of policy holders and IFAs has changed since the arrival of Scottish Life&#39s document entitled, Pro posal for Scottish Life to join the Royal London Group – Questions and Answers for Members and Policyholders.

As a partner in a small provincial IFA firm, I have been bombarded recently by clients who initially felt they would receive windfalls but, on reading the Scottish Life document, now fear they will not. Upon approaching Scottish Life group chief executive Brian Duffin, the situation becomes no clearer. In ess ence, Duffin says membership is determined by an Act of Parliament that sets the constitution of Scottish Life. Scot Life head of communications Alasdair Buchanan refers to this in his recent article (Money Marketing, November 2).

Both further state that as all personal pension plans post-1988, and indeed all group personal pension plans, are written under a master trust with Scottish Life as trustee, then it is Scottish Life that is the member and not the policyholder. This is, I would venture to suggest, a conflict of interest. It also means that several thousand policyholders are not members. Further more, it gives Scottish Life one vote instead of thousands of policyholders at the extraordinary general meeting convened to approve the proposal.

I believe Scottish Life, as trustee, should receive compensation for loss of membership rights for every policyholder for whom it acts in a beneficial manner. Scottish Life is not discharging its duty as trustee if it fails to act in a fiduciary capacity towards the beneficiaries of the trust – the policyholders. This is a difficult area but again appears to have Scottish Life acting on both sides. A conflict of interest? A breach of trust?

My firm has come up with a number of solutions to this problem but, as yet, these have fallen upon deaf ears.

Quite simply, Scottish Life should look at the balance of how the Royal London monies are being distributed. If it believes – and this is open to debate – that a large number of policyholders are not elig ible for compensation for loss of membership rights, this leaves a large number of policy holders getting nothing from the proposal. One solution is that Scottish Life could provide increased reversionary bon uses by £500 for with-profits policyholders. For unit-linked policyholders, it could offer additional units. In both cases, it could issue loan notes or make cash payments.

One concludes that Scot tish Life is trying to minimise the payout. Policyholders feel aggrieved. The strength of feeling ext ends to IFAs that I talk to. They feel misled by Scot tish Life. As a former employee of the company, I cannot help but agree with them.

Brian Duffin has advised me that Scottish Life has studied the precedents of other demutualisations. This is clearly not the case. If it were, then this situation would not have occurred. For example, both Scottish Wid ows and Friends Provident use master trusts for their per sonal pensions and neither of these companies has sought to exclude policyholders under the trust arrangements from membership.

There is a further problem, which the board of Scottish Life seem happy to accept. This relates to the bulk of the funds being made available in the form of additional bonuses. This is quite right in theory, as it is the with-profits policyholders who own the company. But in practice, the bonus distribution on offer appears to serve one purpose – to boost the balance sheet of Scottish Life.

At present, only £160m out of a total of £1,100m – around 14.5 per cent – is being distributed as reversionary bon uses on the sale of Scottish Life to Royal London.

The vast bulk of the monies available, some £829m representing around 75.4 per cent of the total, are being paid as terminal bon uses on death, early surrender or maturity.

There is no guarantee this will happen. Even if such a guarantee were in place, Scot tish Life could alter its own internal terminal bonus declarations to reflect the payout of the Royal London monies.

Scottish Life with-profits pol icy holders are being asked to place a huge element of trust in the new organisation. If the regulator instructs IFAs not to rely on terminal bonuses in deciding on merits of pro viders, then policyholders should discount the possible benefits of terminal bonuses when considering the Scottish Life/Royal London proposal.

Scottish Life advises that the existing with-profits fund will become a closed fund and will therefore be protected. However, in recent correspondence to me, Duffin advises that this closed fund will support future pension review costs and any mortgage end owment review costs.

Duffin has also advised me that a supervisory committee (containing some Scottish Life/Royal London personnel) will be set up to oversee the control of the terminal bonus pot. As this committee will have on it members of the new group, it brings into question its independence.

Although I have put myself forward as a candidate for this committee, according to Duf fin I appear to be insufficiently independent as it is felt I may introduce future business to the group. This is highly unlikely as it stands.

I have asked Messrs Duffin and Buchanan for a meeting to discuss solutions acceptable to both sides but my request to include other IFAs was turned down. I have also requested copies of the legal opinion upon which Scottish Life is relying, along with copies of the master trust and Scottish Life&#39s governing documentation to pass to my legal advisers. I have been referred to Scottish Life&#39s company secretary.

I, in common with all professional advisers, owe both a fiduciary duty and a duty of care to my clients. Based on the information provided by Scottish Life I would not be discharging these duties if I recommend this proposal to my clients.


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