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Scottish Life – why we didn&#39t pay additional bonus

Strong words were used in last week&#39s Money Marketing art-icle about Scottish Life&#39s bonus declaration but it is important to consider – and to understand – the facts, rather than let emotions and possible “kneejerk” reactions cloud the issues.

The easy option, in many ways, would have been for Scottish Life/Royal London to have declared the additional reversionary bonus (ARB). After all, it was our intention to do so when the detailed plan for the demutualisation was drawn up early last year. So why didn&#39t we take the easy option?

The answer is quite simple. Because it was not in the best interests of the policyholders concerned.

Neither Scottish Life nor our parent Royal London has anything to gain from the decision not to declare an ARB. Neither are there any shareholders who might gain from the decision – Scottish Life was a mutual and Royal London is a mutual.

The only people whose interests were considered are the with-profits policyholders whose policies are invested in the closed Scottish Life Fund. So lets get back to the facts.

Fact – a supervisory committee was set up specifically “to safeguard the interests of holders of transferred with-profits policies”. The committee had the power to “recommend that the anticipated annual reversionary bonus should be reduced or not be declared”.

Fact – the decision not to declare the ARB was based solely on the recommendation of the supervisory committee – not Scottish Life, nor Royal London.

Fact – the supervisory committee has a majority of members who are entirely independent of the Royal London board or management.

Fact – the policyholder circular, which was sent to all policyholders – and to their IFAs – in April 2001 gave full information about this. It referred throughout to the “anticipated” ARB. But the circular is a complex and detailed document. So at the same time, Scottish Life sent policyholders and IFAs a questions and answers leaflet which included the following:

What if reduced, or no, additional reversionary bonus is declared?

A reduced, or no, additional reversionary bonus may be declared in the circumstances described in part III of the circular. If so, it is expected that higher terminal bonus enhancements would be made when policies became claims than would have been the case if the additional reversionary bonus had been declared in full.

Fact – the financial and economic circumstances at the end of 2001 were quite different from those in the early months of the year.

As a result, the supervisory committee, having considered the issues carefully, took the view that it was not in policyholders&#39 best interests to declare an ARB.

To have done so could have resulted in restrictions to the investment flexibility of the fund and hence in potentially poorer returns for the policyholders in the fund. This general issue has been well communicated by industry experts on with-profits and financial strength. Its importance should certainly be very firmly in IFAs&#39 minds.

It is only by being prudent – and by anticipating potentially adverse conditions – that strong life companies have remained strong, and can continue to be strong – for the benefit of their with-profits policyholders.

Fact – people with maturing policies are receiving exactly the same payment as if the ARB had been declared.

The value of bonus payments being made on all policy claims are identical to those proposed in the policyholder circular.

All the money paid by Royal London to provide extra ben-efits for with-profits policyholders has been invested in the closed fund. Only policyholders in that fund will enjoy these extra benefits. In addition, the extra financial strength that the closed fund now has can help deliver even better returns for these policyholders, if the investment flexibility is maintained.

The facts speak for themselves.


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