Orphan assets – billions of pounds of “ownerless” money slushing around in with-profits funds – are back on the public agenda again with this week’s news that the life assurer Prudential is taking steps to unlock its £9bn orphan estate.
This move is welcome news for the Pru’s 10m with-profits policyholders as they could receive bonus pay-outs of thousands of pounds as a result, analysts predict.
But if you are likely to be affected you might want to take time for reflection. Analysts say it will be many months or possibly years before you are able to get your hands on that money.
“It’s way too early for people to be talking about the money on the table,” says Ned Cazalet, an independent insurance consultant. And how much of these orphan assets will find their way into the coffers of policyholders is likely to be the subject of fierce debate.
It’s been a while since a fuss was made over the distribution of so-called orphan estates. The last time came about in 2000 when Axa, the French insurer, opened its £1.7bn orphan estate and set a precedent by agreeing a new type of deal with regulators. Critics rose to protest, arguing that it was unfair to Axa’s
hundreds of thousands of policyholders.
Under the terms, policyholders were eligible for two payouts. The first was a £250m payment taken from the orphan estate, which added about 3 per cent to individuals’ with-profits policies when they matured. The more controversial one was a one-off payment of up to £300m from Axa’s coffers awarded if policyholders agreed to renounce ownership of the remaining money in the orphan estate. That amount equated to a cash payment of £400 per policy, a measly sum in the eyes of critics (Axa’s articles of association and those of other insurers state that policyholders have ownership of 90 per cent of any distribution of the estate).
Seven years later, orphan estates are again generating a flurry of attention. While billions in orphan estate money is held by a handful of UK life insurers, the spotlight is focused on the estates of the two biggest quoted insurers – Aviva, which manages Norwich Union with-profits policies, and Prudential – as both appear likely to carve up their rather large pots in the near future. “No other insurers have remotely comparable pools of slush lying around,” says Bruno Paulson, a Bernstein analyst.
But it is likely that criticism from consumer groups will be just as shrill this time around. Why? The battle is the same as it was in the time of Axa’s redistribution. Who deserves a bigger bit of the pie? Policyholders or shareholders? That is the question up for debate.
“We will be monitoring the process at both Aviva and Prudential carefully and if policyholders receive any amount less than 90 per cent of the distribution, we are going to protest,” says Doug Taylor, a spokesman for Which?, the consumer advocacy group.
Up for grabs at Prudential is about £9bn in estate money (although taking into account capital requirements that figure may be closer to £6bn) while Aviva has to decide what to do with a £4.2bn pot.
Aviva is a lot further down the process of redistributing the inherited estates of its two eligible with-profits funds: CGNU Life and CULAC. Together, these funds have about £4.2bn of “estate” assets of which about £3bn is surplus to the capital requirements of regulators and therefore available to be redistributed to the funds’ 1.1m
policyholders, analysts say.
Clare Spottiswoode, Aviva’s policyholder advocate, has already contacted those policyholders eligible for reattribution of this money. Negotiations are set to take place over the next few months followed by a high court hearing. Payments are finally likely to come early next year, according to the plan approved by the Financial Services Authority. Analysts at Bernstein Research, the financial services research group, forecast that policyholders will receive average payouts of close to £2,000 while Aviva shareholders will net about 30 to 40 per cent of the £4.2bn estate.
Prudential, meanwhile, this week indicated that it is now on the hunt for a policyholder advocate like Spottiswoode. But that is as far down the road as the Pru has gone. Analysts estimate that Prudential has about £9bn in orphan assets and say so far its management has not been keen to distribute the money because it does not want to put strain on its shareholder capital.
While Aviva and Prudential are generating more attention, another group in the news over this issue is Hugh Osmond’s Pearl Group, the consolidator of closed life assurance funds.
At the beginning of the week, it announced it would distribute £500m from its inherited estate to 1m with-profits policyholders. The amount will be distributed in at least three spurts over the next two to three years depending on the condition of the markets. The first distribution of £100m will take place this July and the second, six months later. On average, Pearl’s policyholders are expected to receive a total of £500, paid as additional bonuses added to individual policies. “But that amount can vary widely, depending on when your policy matures,” says Tony Langham, a spokesman for Pearl. “If your policy matures in August of this year, for example, you would just benefit from one distribution.” Pearl has been closed to new business for almost three years.
Apart from Aviva and Prudential, it is unlikely that other life assurers will move to distribute their inherited estates, analysts say. Standard Life, HBOS, Aegon, Friends Provident and Scottish Widows, which is owned by Lloyds TSB, dealt with this issue when they demutualised or became public companies and changed their capital structures. Analysts say mutuals such as Royal London and Liverpool Victoria, face little pressure to hand this money to policyholders.