Treasury Committee debates inherited estate distribution

A Treasury Select Committee conducted an inquiry on 22 and 30 April to discuss the fairness of current approaches to distributing the inherited estate of with-profits funds of life assurance companies.

The committee held four evidence sessions, hearing statements from consumer group Which?, the FSA, Clare Spottiswoode CBE (policyholder advocate for Norwich Union) and Mark Hodges and Nick Prettejohn, the chief executives of Norwich Union and Prudential respectively.

The inquiry discussed a very wide range of themes concerning the distribution of inherited estates of with-profits funds including: the governance framework around reattribution exercises; determining equity between current and future policyholders and between policyholders and shareholders and; use of the estate to support corporate activities.

The issues highlighted and claims made were:

1 The current regulatory approach creates conflicts of interests. Directors have a fiduciary responsibility to maximise shareholder returns and so cannot be assumed to exercise discretion in a way that maximises returns for policyholders and so treat customers fairly.

2 The current with-profits governance structure is inadequate. Companies appoint members of with-profits committees (WPCs). There are no requirements for WPCs to demonstrate their independence from the company or for the company to take their views on board.

3 Clare Spottiswoode highlighted the need for two key regulatory principles that would remove the lack of transparency around the exercise of discretion in with-profits funds. These principles are:
>> All capital within a with-profits fund should be treated identically, regardless of whether or not it is held to meet liabilities or as part of the inherited estate. Among the examples highlighted were the levying of shareholder tax.
>> Companies should be made to treat policyholder capital in the same way as shareholder capital when deciding how it should be utilised in corporate activities such as new business or paying mis-selling compensation.

4 The presence of an inherited estate creates barriers to entry for other with-profits companies. The current regulatory framework allows the estate to be used to subsidise new with-profits business that may be unprofitable if written using shareholder capital only.

5 There is a serious imbalance of power in negotiating the size and nature of distributions of the estate under the current regulatory mechanism. Policyholders are being made ‘offers they cannot refuse’. In some circumstances, the method of distribution could also constitute a barrier to exit.

The sessions are available to view at www.parliamentlive.tv/Main/Archive.aspx