Inherited estates

Two of the UK’s largest life offices have announced that they are looking into unlocking millions of pounds lying dormant in “inherited estates” for with-profits policyholders.

But hopes of large windfalls for policyholders should be kept in check. Details of how much might be paid out are not yet clear and are likely to be the subject of fierce negotiation in coming months.

The prizes up for grabs are considerable. Aviva, which manages Norwich Union’s with-profits policies, has amassed £5bn and Prudential has around £9bn, all gathering dust in life funds underlying with-profits policies.

The plans are also clearly worth a lot to the life assurance companies, who are spending heavily on proposals to reattribute the funds. But there are question marks over whether the distribution between policyholders and shareholders will be fair. Policyholders are required to make compromises in order to see some of the money from inherited estates now. In exchange for payment, they are being asked to give up any right to benefits from future distributions.

What is an inherited estate?

Inherited estates are surplus assets that have built up within life funds over years. The money is deemed by the company to not be required to meet policyholders’ obligations, but cannot be released without the approval of the Financial Services Authority.

It is owned and retained by a company to provide security for policyholders against adverse market conditions. Having a spare pot of money allows them to make larger equity bets and provides them with investment flexibility.

Policyholders have rights over any future distribution of the money in inherited estates but, alongside shareholders, have no ownership rights.

What do life offices want to do with this money?

Prudential and Aviva are looking into following in the footsteps of Axa, which reattributed this money in 2000.

Reattribution allows a life company to reorganise the inherited estate to pay money out to policyholders and shareholders by clarifying the ownership of the money through a court process. Rather than the money leaving the fund, shareholders pay policyholders themselves and in return policyholders agree to forgo any possible future distributions from the inherited estate. Policyholders would have a right to 90 per cent of any future distributions so in return for instant cash, are expected to accept a smaller slice of the pie for reattribution. The inherited estate then remains within the life company and supports the capital of the with-profits funds. The money will eventually be released but is likely to stay in the fund for a number of years. When it is released it will go to shareholders.

It is up to the shareholders and policyholders to agree on a suitable split. Aviva appointed Clare Spottiswoode, former head of Ofgas, the gas regulator, as policyholder advocate to facilitate this.

What is a policyholder advocate?

Advocates are hired to represent the rights of the policyholders and FSA rules state that a policyholder advocate must be appointed to govern re-attribution. The advocate is responsible for negotiating with the company on the size of the payment to eligible policyholders.

This week Prudential announced it had appointed Peter Bloxham, former head of restructuring at City law firm Freshfields Bruckhaus Deringer, to represent policyholders.

At Aviva, Spottiswoode has just finished the first part of a formal consultation process with policyholders who hold money in two Norwich Union funds: CGNU Life and Commercial Union Life Assurance Company (CULAC). She is about to start negotiations with Aviva on the structure of any offer that may be made.

Following these, a report will be made and sent to eligible with-profits policyholders.

What can policyholders expect?

Unlike other distributions, policyholders are not entitled to 90 per cent of any money portioned out in re-attribution.

In 2000 when Axa, the French insurer, released its £1.7bn of inherited estate money, it set up an agreement whereby policyholders would receive two payments. One added around 3 per cent to each policy; the other was a one-off payment amounting to around £400 per policy. In return, policyholders relinquished all rights over further redistributions.

Why do policyholders get less than the 90/10 split in re-attribution?

Life offices say this is because the money is not a distribution in the way annual and terminal bonuses are. It is surplus money that over the years has accumulated in value.

Why are the life offices releasing this money now?

Norwich Union says the FSA’s clarification of re-attribution rules a few years ago has led life offices to reconsider usage of inherited funds, but that it also has something to do with the future of with-profits funds themselves. “There is a question of timing,” says John Lister, chief actuary at Norwich Union. “We think re-attribution is the right thing to do now because with-profits funds are not growing at the same rate they used to.”

Do policyholders have to take the deal offered to them?

No. Any policyholder can decide not to take the offer and wait for future distributions. If you do not consider the deal acceptable, you are under no obligation to accept it, in which case you will remain in a separate ring-fenced fund with its inherited estate intact.