Long-time favourite of the IFA community, Standard Life has finally capitulated to what many saw as the inevitable but only after it was pressurised into doing so by the FSA.
The Government's embarrassment over the Equitable Life fiasco was never going to allow a similar problem again and Standard Life has ended up as the whipping boy.
Ever since the Baird report, the writing was probably on the wall if anyone took long enough to read it. The FSA report made a number of recommendations about the regulation of life insurance and, in particular, it called for improved standards of solvency and disclosure.
All very well, you might think. But what does it mean in practice? Leaving aside the possible short-term sweetener of demutualisation bonuses for policyholders – which might average only £1,500 – the company has been forced to sell £7.5bn of equities at a time when markets are a long way below their peak.
Many policyholders who bought with-profits on the strength of Standard Life's undisputed investment pedigree will never find out how well they would have fared over the full term. Having their assets switched heavily into bonds, they are doomed to lower returns.
Bonds are looking cheap at the moment. Was that what Standard Life would have done if it had been left to manage its own affairs? Moreover, did the policyholders want to switch to bonds and did they have any say in the matter?
In being forced to adopt the FSA's new realistic valuation approach – also known as, let's not have another Equitable Life, thank you – Standard Life policyholders have been forced into doing what every IFA knows is wrong, that is, selling at the bottom of one market and immediately buying at the top of another.
Although Sandy Crombie is putting a brave face on matters, claiming there was a certain inevitability about demutualisation, that is not what Standard Life was saying just a few months earlier when it claimed that as a strong, well run mutual, it had the ability to provide better with-profits returns than its competitors.
When Fred Woollard tried to force a demutualisation in 2000, less than half the policyholders were in favour. That was at a time when demutualisation bonuses would have been very handsome indeed. But demutualisation is now an inevitability and although there is to be a vote in 2006, without support from the management for continuing its mutual status, the chances of the vote going against the proposals are nil.
Fundamental to the whole problem is managing risk on the one hand and managing expectations on the other. Unfortunately, the Government has allowed people's expectations to be raised to an unrealistic level and, in the claims' culture that has now emerged, losing money is intolerable and demands compensation. The reality is that if we factor out risk altogether, then everything costs more simply because investment returns are bound to be lower. That is why low-cost endowments became popular in the first place and, equally, why traditional guaranteed annuities are currently so unpopular.
For years, with-profits policyholders have enjoyed attractive long-term returns. Based on a recent ABI report, the average 25-year endowment that matured in August 2002 produced a net annual return of 10.72 per cent and that was having reached maturity in the middle of the stockmarket slump. Achieving good returns must involve some risk but, spread over the longer term, just how much risk were Standard's with-profits policyholders really exposed to? Now, they will get lower returns and many will think the trade-off has not been in their best interests.
Sadly, the political cards are stacked against with-profits and mutuality but I cannot help feeling that we will live to regret allowing these concepts to wither away.
Steve Patterson is managing director of Intelligent Pensions