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Standard Life edge

The news that Standard Life has made the crucial decision to demutualise comes as no surprise to many people. It seems that the move was inevitable following its recent spat with the FSA over the introduction of the new realistic reporting regime.

The disagreement arose over Standard&#39s inclusion of future profits in its balance sheet and the FSA has made it clear that it does not want future profits counted in its new solvency regime. To be fair, Standard resolved the matter in weeks. The result of its realistic balance sheet showed that it has surplus assets of £4.6bn – over twice the minimum risk capital margin required – and the FSA duly signed off the report.

The proposal will be put to members at the 2006 annual meeting. So, demutualisation is still some way off and Standard states that the decision has been carefully considered and the process will be carried out in its own timescale. If the plans for demutualisation had been rushed through, it would have looked increasingly suspicious in light of the disagreement with the FSA and may have looked like Standard really did have something to hide.

But what will demutualisation mean for Standard&#39s members? Initially, of course, they will benefit from a windfall but they will have lost the benefits that mutual status brings and the potential returns from policies may be lower as the company will now have to meet shareholder demand for ever increasing dividends.

The debate over which type of firm generates better returns has gone on for years. Plcs argue that they are leaner and better able to get at capital for expansion which, in turn, benefits policyholders, staff and potential shareholders. Mutual companies argue that they can focus on the provision of benefits and services to members, without the need to consider shareholders&#39 requirements.

Standard states that the proportion of the business within with-profits has halved in the last two years and is expected to continue to decline. Having identified this decline in with-profits business, to be able to diversify its business as it plans to, it would be putting members at an increasing level of risk. For example, is it justifiable to use money belonging to policyholders in a with-profits fund for risky ventures such as expanding into China?

Standard&#39s business reasons for demutualisation are sound. As a mutual, it is unable to raise the capital required to expand and diversify the business because of the nature of a mutual company. Profits made by a mutual are shared between members and, because of this vested interest, members will not put pressure on the managers to drive the company forwards into expansive and risky growth opportunities.

By demutualising, Standard will have the ability to raise capital in a number of ways. Extra capital can be raised at the time of conversion for expansion and investment in the business. Once Standard has floated, with the members now becoming shareholders, institutions and pension and tracker funds will want to buy shares as they will require exposure to the company. This will inevitably inflate the share price as demand will be high. Standard could also have a rights issue to generate further capital.

The demutualisation of Standard Life has never been a matter of if, more a matter of when. Our view of mutual companies tends to be a romantic and idealised one. We are comforted by the concept of investing in a company in which we become a member and the fortunes of this communal company are repaid as benefits to all members alike.

However, this concept does not sit easily with companies the size of Standard Life. Due to the severities of the marketplace, companies like Standard need to be able to compete on level terms with their competitors. Standard may have been nudged into the position of demutualisation but even it realises the necessity and practicality of such a step.

Ben Willis is business development manager of Chartwell Investment Management


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