Verity’s view

In recent weeks, certain mischievous members of the media with memories stretching back five years have had occasion to contact Fred Woollard, the financier who challenged Standard Life’s directors to demutualise back in 2000.

It is not hard to bash Standard Life these days. For example, it has just announced sales figures which – on a like-for like basis using the annual premium equivalent measure – are down by 12 per cent.

When the memory of 2000 is evoked, it reminds us what a great thing is hindsight. Standard Life’s two-and-a-half million or so with-profits policyholders are currently expected, by informed observers who are necessarily guessing, to receive shares and/or windfall bonuses totalling somewhere between £1,000 and £3,000 when the group demutualises next year.

Had they voted to support Woollard’s move to demutualise the group five years ago – when Standard Life’s board, including current chief executive Sandy Crombie, were robustly opposed to a flotation – they would then have reaped much more. According to some estimates at the time, they could have expected an average of £8,000, with some long-serving members receiving upwards of £50,000. “See – should have voted for me,” Woollard is quoted as saying, or words to that effect.

It seems like a powerful argument but it is really little more than a testament to the power of hindsight. That potential windfall has shrunk for several reasons, none of which could have been known to either party at the time.

The biggest reason is, of course, the general revaluation of share prices in 2000-02. The second reason springs from the first. Standard Life’s investment managers felt convinced that the downward trend which started in 2000 was only temporary and would end.

As it turned out, the downturn was far from temporary and, when the upturn came, it was nowhere near what Standard Life hoped or expected. End result – it has been forced to sell £7.5bn of shares at disadvantageous prices.

Would Woollard have been a more conservative investor, more inclined to adjust Standard Life’s investment mix early on, selling shares and buying gilts? Probably not. Only hindsight makes us so wise.

But the real, twisted irony of Standard Life’s story is the one that will not be lost on the hundreds of staff who are already losing their jobs (further redundancies have been hinted at). Many of them will have been involved enthusiastically in supporting the mutual campaign which suddenly united staff and management, breathing spirit into a rather staid organisation back in 2000.

It was a similar spirit which had animated the staff of Nationwide a year earlier. After being a fairly dull and uninspiring financial organisation for as long as anyone could remember, it suddenly found itself endowed with an exciting, distinctive character.

Standard Life, like Nationwide, was one of very few mutual companies left.

Nationwide could demonstrate the benefits of mutuality by comparing its mortgage rates with those of proprietary lenders. If members voted to demutualise, the directors pointed out, they might get shares worth £500. But within a year or two, the average borrower was likely to lose that in higher rates of interest.

Standard Life had no such clear arguments. The benefits of mutuality would come in an increment to expected returns, meaning lots of money in the long run. But without brushing up against the regulations, you could not quite say how much. The benefits of mutuality, though real, were very difficult to demonstrate.

Afterwards, determined to press home its point, the group included a figure meant to represent the expected benefits of mutuality in its illustrations of how much policyholders might expect from their investments.

It was this that led to the row with the FSA about whether it should adjust its reserves to reflect that expectation, which forced Standard Life to sell shares and buy gilts, which in turn led to the resignation of Iain Lumsden as chief executive and made demutualisation inevitable.

Votes – at annual general meetings as much as at elections – have to be fought on clear, simple issues that have at least a chance of getting voters sufficiently stirred up to influence them at the ballot box. The Conservatives know they are unlikely to persuade many voters to get up off the sofa, walk down the road to the local primary school and tick their party’s box by attacking Chancellor Gordon Brown on the abolition of advance corporation tax on company dividends, however outrageous they feel that move to have been. It is too complicated, too obscure. Had the Chancellor raised income tax by an equivalent amount, their campaign would have been far easier.

That brute fact is relevant and pertinent to the financial services industry for this reason – people will fight for and defend what they have financially, only if they value it. Here is the crucial bit – they will value it only insofar as they understand it.

The benefits of being a mutual life insurer are indeed worth something and over the years they are likely to be worth thousands of pounds more than a windfall. But no one understands enough to care. The benefits of being a mutual life insurer are disappearing, not because they are not valuable but because they are obscure.

Almost exactly the same arguments apply to the benefits of investing in any with-profits policy and it is for the same reasons that with-profits, like mutuality, is dying. In the future, the first rule of survival will be this – make sure you are clearly understood.

Andrew Verity is a financial reporter at the BBC

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