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Verity&#39s view

Iain Lumsden&#39s sudden departure from Standard Life after 36 years at the company was, officially, simply a matter of timing.

The life insurer&#39s strategic review – which will consider, among other options, the demutualisation of Europe&#39s biggest mutual company – would take too long for him to see it through before his planned retirement date so it made sense for him to go now.

Unofficially, observers have quite reasonably been speculating that he did not see eye to eye with the new-boy chairman from the beer industry, Sir Brian Stewart, about the way forward for the group.

Lumsden is perceived to have been staunchly in favour of mutuality while Sandy Crombie, the former chief investment officer who has now taken the helm, is perceived to have been more ambivalent about it.

It is a reasonable speculation, given Iain Lumsden&#39s record. Back in 2000, when Lumsden was finance director, Monaco-based investor Fred Woollard launched his bid to demutualise the group.

Again, officially, Standard Life&#39s approach to the issue was that it was not ideologically wedded to mutuality and would consider all options but, on balance, thought that mutuality was best for its customers. Unofficially, the rumours were that Scott Bell had told the group&#39s board of directors “It&#39s mutuality or me”.

But Standard Life had a problem – how do you show the benefits of mutuality as a life insurer?

I remember attending a briefing held by Jim Stretton, then Standard Life&#39s most senior spokesman, where he repeatedly talked about the benefits of mutuality – but signally failed to put any numbers on it. It was clear that, without the numbers, it would be much harder to fight off Woollard.

When it became clear how serious the threat had become, Lumsden and other directors started fighting harder. Standard Life staff were mobilised to contact IFAs and customers to canvass their views and put the case for mutuality. But again, there was a problem because there was only so much they could say validly. You could not definitively say: “Payouts will be lower if we demutualise”. When some staff did say or hint this, independent analyst Ned Cazalet accused Standard of telling less than the whole truth – because policyholders&#39 reasonable expectations should, according to the law, be unaffected by any demutualisation.

If payouts did drop as a result of demutualisation, there could be legal challenges. Lumsden took exception to this – and thus began a long-running feud.

Ironically, Sandy Crombie, the new chief executive, was at least as fervently pro-mutual as Lumsden so why has he changed his mind?

More important perhaps, Standard Life recognised in 2000 that the defence of its mutual status was intimately bound up with the need to demonstrate the value of that status in clear, easily understandable financial terms. Only then could it could win the argument and fend off further challenges.

It started adding a figure on to its illustrations of projected returns – typically 0.5 per cent a year – for the benefits of mutuality. That was to prove one of the nubs of disagreement with the FSA.

The FSA&#39s “realistic” reporting regime is controversial but it does have a sensible objective – getting life insurers to put their money where their mouth is.

Until now, there was only one really expensive word for a life insurer to utter – the G-word. The old statutory regime required them to back up guarantees – be they guaranteed minimum returns or guaranteed annuities.

If their spare capital shrank, that would mean selling shares and buying gilts, depressing prospective returns and generally upsetting the finances. But non-guaranteed elements of the policy such as terminal bonuses carried little or no financial implications.

What was daft about it was the gap between what policyholders were led to expect and what the companies had to reserve for. Whereas ann-ual bonuses counted as liabilities, terminal bonuses did not. Life offices were selling a policy on one basis and arranging their finances on another.

The realistic method requires them to account for non-guaranteed elements on a “stochastic basis”. Instead of guarantees costing everything and non-guaranteed elements nothing, they have to reserve for the non-guaranteed bits according to the likelihood of having to pay them.

That means that terminal bonuses come into it – and so do all other “non-guaranteed” promises. If they build in the 0.5 per cent “benefit of mutuality”, they have to reserve for it – selling shares and buying gilts.

The guarantees that Standard made in the past are, under the new regime, and with Standard&#39s capital much diminished from its level of three years ago, hurting its business. With so much set aside to reserve for the G-word, there is less capital available for the capital-intensive business of getting policies out there – that means your commission.

The FSA has reduced the amount the life insurer can count as an asset from its multiple fund-raising exercises, further squeezing its finances. Standard says it is a coincidence that the latter measure took £700m away while at the same time it decided to raise £750m in an expensive fashion through hybrid capital.

Would it have chosen this expensive route if it could afford to wait? Raising that money through a rights issue after demutualisation would probably be cheaper.

But there is a slight taste of bitterness about Standard&#39s decision to start charging for its guarantees. Although it will not be retrospective, it will come as a shock to policyholders who have come to think of guarantees as having their cost built in.

On the other hand, given the bitterness of Equitable Life&#39s policyholders at having to cough up for misguided guarantees, it is arguable that this is fairer on those who do not have guarantees. The FSA&#39s independent investigators will have to decide what is “fair” – a task not dissimilar to that assigned to the House of Lords in Equitable&#39s case back in 2000. In many ways, the circumstances are different but they will have to be careful.

Andrew Verity is personal finance correspondent at the BBC


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