Standard Life has denied that its policyholders are bearing the brunt of the market downturn, after announcing sizeable losses on investments but increasing the dividends paid to shareholders.
In its 2008 results, the life insurance and pensions group blamed market conditions for the poor performance of its funds. However, in spite of recording underlying pre-tax losses, it still boosted its full-year dividend by 2 per cent.
Less than a week after this announcement, the Edinburgh-based insurer imposed new exit penalties affecting up to 1.4m policyholders who may want to encash poorly performing plans.
The group cited significant market falls as the reason for its decision to impose reductions of between 5 and 8 per cent on the surrender and transfer values on many pension and endowment policies.
Although these changes will not affect payouts on maturity or at normal retirement age, further pain for policyholders was not ruled out – the insurer said more adjustments could be announced if markets continue to decline.
There was also bad news for those whose plans are nearing maturity. Standard Life revealed that the value of its “inherited estate” had plummeted 80 per cent to £300m, from £1.5bn at the end of 2007.
This inherited estate was set aside for the benefit of policyholders when Standard Life was demutualised three years ago. It has since been used to make “enhanced” payments to maturing plans, over and above the final and annual bonuses paid during the life of the plans.
Paul Keeble, a spokesman for Standard Life, says the insurer does not know if, or when, its surplus assets pot would run dry, but denies that the decision to pay a dividend to shareholders contributed to its poor performance, or that of its with-profits funds.
“It is entirely unrelated,” he says. “The continuing extreme market conditions have made further action on our with-profits funds unavoidable. Unlike some other insurers, Standard Life has what is known as a 100/0 with-profits fund. This means that the fund is run 100 per cent for the policyholders, with no profits going to shareholders.”
Standard Life also pointed out that the 2.3 per cent increase in dividend for its 2008 performance was less than the 6.5 per cent increase in 2007. Its final dividend was held flat at 7.7p to reflect market conditions.
The insurer said that in January an estimated £800m of bonuses were to be added to with-profits policies, resulting in year-on-year increases in payout values across all types of plans.
But some were not convinced by its policy of “smoothing” out returns, whereby the upside from with-profits funds in good years is held back for redistribution in poorer performing years. Annual and final bonuses are supposed to be managed in this way, so that policyholders receive a fair return, whether at maturity or when surrendering earlier.
“Standard Life reduced the amount of smoothing on its stakeholder with-profits fund on December 11 2008 in light of severe equity market falls,” says David Trenner, technical director at Intelligent Pensions. “The move resulted in an overnight reduction in all payout values of around 10 per cent.
“If anyone was in any doubt as to who was going to lose out from demutualisation, they have the answer: policyholders clearly come second to shareholders now.”
Others say the announcements by Standard Life, and recent cuts imposed by other large with-profits providers, will be another blow for policyholders, who should now consider their options.
“The fall in the value of with-profits hasn’t fully reflected the fall in markets so there may be more pain to come,” warns Adrian Lowcock, senior investment adviser with Bestinvest, the independent financial advisers. “The critical thing is the exit penalty and whether the upfront losses can be compensated by better performance elsewhere. It is not a one-size fits all answer.”
