Funds surplus: whose billions are they anyway? LIFE POLICIES

John Murray on the battle for the life assurance companies' surplus funds

Legal & General's decision to press the Department of Trade and Industry for more flexibility in distributing investment returns to shareholders will have left millions of policyholders with a distinctly uneasy feeling.

Not surprisingly, the announcement boosted the share prices of many life insurance companies on expectations of large windfall profits. Such a reaction set alarm bells ringing among policyholders - who must now be wondering whether they would have been better off investing with a mutual.

Appropriately it fell to Sir John Nott, the former defence secretary who is an L&G policyholder to spring to the defence of fellow investors.

At issue are the surpluses that build up in insurers' long-term life funds - known as orphan estates. These are used to pay policyholders' bonuses, but recently companies have begun to identify surplus assets which they say will not be necessary to pay reasonable returns to policyholders.

In the case of insurance companies that are not mutuals the plan is to allocate ownership of these assets to the shareholders rather than policyholders.

But the issues are complex - and the ensuing debate should help to clear up the matter in a manner that protects the interests of both policyholders and shareholders.

The first company to set the ball rolling, United Friendly, provides a comparatively simple example of the issues involved.

United went to the Department of Trade and Industry to seek permission to allocate a surplus of £275m to shareholders. The DTI agreed, but this does not mean an immediate windfall for United's shareholders. What it does mean is that the £275m has been earmarked as the shareholders' interest in the fund, and United can allocate the investment income on that to shareholders in the form of increased dividends.

The question asked by Sir John is: "Who identifies the surplus and on what basis?" The answer is that the fund's chief actuary makes a calculation of the amount of capital in the fund needed to finance the bonuses payable to with-profits policyholders. Sir John points out that the actuary, who may often be a director of the company, has a vested interest in favouring shareholders over policyholders in that ultimately he is answerable to shareholders and his pay and bonuses may depend on the health of the share price.

Industry insiders point out that the actuary has a statutory duty to protect the interests of policyholders and must satisfy the DTI that all is well.

But in fact the surpluses often build up because of a conservative distribution policy by the company, whereby the bonuses it pays out are modest by comparison to the investment gains being made by the fund.

Thus in some cases, there is an argument that shareholders are benefiting at the expense of policyholders, who could have been paid higher bonuses along the way. But other cases are more complicated, because the surplus identified has come not just from better investment returns from with- profits business, but also from shareholders' capital in the life fund.

Legal and General is a case in point. It has retained capital belonging to shareholders in its life fund, because it only started writing with- profits business in 1954. The surplus accumulated before then clearly belongs to the owners of the company: the shareholders. The company also argues that shareholders are entitled to a return from the capital they put up to support the writing of new business.

In any event, L&G has begun discussions with the DTI merely to work out a more rational way of distributing investment profits from the surplus.

Currently it is more or less bound by the traditional 90:10 split between policyholders and shareholders that applies to its with-profits business. The L&G has relied not just on its in-house actuarial talent, but also on the services of actuarial consultants.

Sir John said last week that he is not specifically criticising L&G for beginning discussions with the DTI over its orphan estate; rather that he feels that the rush of insurers to the department raises general questions of accountability and the protection of policyholders in non-mutual companies.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Steve Bruce and Gus Poyet clash
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
Life and Style
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
Amazon misled consumers about subscription fees, the ASA has ruled
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    SThree: Recruitment Resourcer

    £20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn