Personal Finance: When pounds 5bn is up for grabs, you have to expect a fight

Who will benefit from Prudential's massive `orphan assets', surplus cash generated on the company's strong returns

When Prudential announced recently that it would pay victims of pension mis-selling redress out of a huge surplus in its with-profits fund, the decision came under heavy criticism from consumer groups. The Financial Services Authority, the new super-regulator, is known to be looking at the issue of where compensation for pensions mis-selling should come from.

At least the criticism has helped to focus attention on "orphan assets", the term used for surplus cash in with-profits funds. Orphan assets come about because of strong returns on with-profits business and shareholders' cash. In effect, neither shareholders or policyholders have taken as much out of the business as they could have.

Life insurance companies want to access some of this money, arguing that large chunks of it only accrued because shareholders' resources were used to build up the business. Prudential's fund has a pounds 12bn surplus, from which its pounds 1.1bn provision for pension misselling will be taken. But within that pounds 12bn is a pool of cash whose ownership is unclear. Analysts estimate this is worth up to pounds 5bn, although the Pru says it is likely to be much less.

Prudential has been criticised for not paying for mis-selling directly out of shareholders' cash. But how it is allowed to use its orphan assets is potentially just as controversial and could be a test case for the industry.

The company has been in negotiations with the Department of Trade and Industry (DTI) over the money. Life insurers argue "policyholders' reasonable expectations" will not be affected by distributing this spare cash.

If shareholders are granted a significant proportion of it, the money could be used to pay extra dividends, help fund acquisition, or help expand the business.

The 1990s have seen a rash of life insurers negotiating with the Government to enable them to access the cash.

Until now, however, they have tended to be funds mainly built up from industrial branch business, cheap policies sold door-to-door, a type of business most companies have now pulled out of.

Traditionally this type of business sees returns from with profits funds of shareholder owned companies split, with 90 per cent going to to policyholders and 10 per cent to shareholders. Companies such as Britannic Assurance are among those involved in industrial branch business who are in discussion over orphan assets.

Prudential's negotiations are being keenly watched by the industry because they involve "ordinary branch business", the day-to-day activities of its salesforce. Should the Pru be able to access funds from such business, it could open the floodgates to similar claims.

Analysts say companies such as Axa, Commercial General Union, Legal & General, Pearl, Britannic Assurance, and United Assurance could follow suit. If the DTI refuses to strike a deal, the courts could be an option.

Merrill Lynch insurance analyst Roman Cizdyn says: "Prudential in important historically. The Government has only allowed industrial branch funds to be accessed. It has not given ground on ordinary branch business.

"If they were to make a breakthrough Axa would be able to go back, CGU would probably look at the issue as would Legal & General."

He doubts whether Prudential's lobbying of the Government will be successful, leaving the courts as its only option.

Alan Richards, a former life insurance analyst and director of Arc Asset Management, tips recently merged companies such as Royal & Sun Alliance, Axa Sun Life, which merged with Equity & Law, then Sun Life and Commercial General Union. "I think Axa will go to the courts. If they are successful it would be ground-breaking for the rest of the industry."

Philip Telford, senior money researcher at the Consumers' Association, says: "The issue of policyholders' reasonable expectations is rather vague. There are prudent reasons for smoothign but it seems these funds can build up. Some has to go to share holders but policyholders should benefit as well."

Compare with the Independent: See how much you could save by switching credit cards. Compare now

Arts & Entertainment
Ricky Gervais at a screening of 'Muppets Most Wanted' in London last month
tvAs the second series of his divisive sitcom 'Derek' hits screens, the comedian on why he'll never bow to critics who habitually circle his work
Arts & Entertainment
Don (John Hamm) and Megan (Jessica Paré) Draper are going their separate ways in the final series of ‘Mad Men’
tvReview: The suits are still sharp, but Don Draper has lost his edge
News
news
Life & Style
Going down: Google's ambition to build an elevator into space isn't likely to be fulfilled any time soon
techTechnology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
VIDEO
News
David Cameron sings a hymn during the enthronement service of The Most Rev Justin Welby as Archbishop of Canterbury, at Canterbury Cathedral last year
news
Life & Style
From long to Jong: Guy Pewsey outside Mo Nabbach’s M&M Hair Academy in west London before the haircut
fashionThe Independent heads to an Ealing hairdressers to try out the North Korean dictator's trademark do
Sport
Vito Mannone fails to keep out Samir Nasri's late strike
sportMan City 2 Sunderland 2: Keeper flaps at Nasri's late leveller, but Black Cat striker's two goals in 10 minutes had already done damage
Extras
indybest10 best smartphones
News
peopleRyan Gosling says yes, science says no. Take the A-list facial hair challenge
Arts & Entertainment
tvCreator Vince Gilligan sheds light on alternate endings
Life & Style
Google Doodle celebrates the 63rd anniversary of the Peak District National Park
tech
News
Paul Weller, aka the Modfather, performing at last year’s Isle of Wight Festival in Newport
people
Life & Style
Michael Acton Smith founded Firebox straight out of university before creating Moshi Monsters
techHe started out selling silliness with online retailer Firebox, before launching virtual creatures who took the real world by storm
News
Ethical matters: pupils during a philosophy lesson
educationTaunton School's policy of putting philosophy at heart of its curriculum is one of secrets of its success
Arts & Entertainment
Play It Forward: the DC Record Fair in Washington, US
musicIndependent music shops can offer a tempting alternative to downloads on Record Store Day
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Analyst - Financial services, Client data, LEI

    £40000 - £50000 per annum + BONUS + BENEFITS: Harrington Starr: A leading, Cit...

    Management Consultancy - Operational Research Analysts

    £35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

    Corporate Actions Consultant - Market data, ISO15022, presales

    £45000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: Corporate Acti...

    Prudential Risk/Operational Risk Associate - London

    £350 - £400 per day: Harrington Starr: An opportunity has arisen at a FCA regu...

    Day In a Page

    Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

    Ricky Gervais: 'People are waiting for me to fail'

    As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
    Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

    Mad Men returns for a final fling

    The suits are still sharp, but Don Draper has lost his edge
    Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

    Google finds a lift into space will never get off the ground

    Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
    Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics

    Is sexual harassment a fact of gay life?

    Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics
    Moshi Monster creator Michael Acton Smith: The man behind a British success story

    Moshi Monster creator Michael Acton Smith

    Acton Smith launched a world of virtual creatures who took the real world by storm
    Kim Jong-un's haircut: The Independent heads to Ealing to try out the dictator's do

    Our journalist tries out Kim Jong-un's haircut

    The North Korean embassy in London complained when M&M Hair Academy used Kim Jong-un's image in the window. Curious, Guy Pewsey heads to the hair salon and surrenders to the clippers
    A History of the First World War in 100 moments: A forgotten naval victory in which even Nature played a part

    A History of the First World War in 100 moments

    A forgotten naval victory in which even Nature played a part
    Vespa rides on with launch of Primavera: Iconic Italian scooter still revving up millions of sales

    Vespa rides on with launch of the Primavera

    The Vespa has been a style icon since the 1950s and the release this month of its latest model confirms it has lost little of its lustre
    Record Store Day: Independent music shops can offer a tempting alternative to downloads

    Record Store Day celebrates independent music shops

    This Saturday sees a host of events around the country to champion the sellers of well-grooved wax
    Taunton's policy of putting philosophy at heart of its curriculum is one of secrets of its success

    Education: Secret of Taunton's success

    Taunton School, in Somerset, is one of the country's leading independent schools, says Richard Garner
    10 best smartphones

    10 best smartphones

    With a number of new smartphones on the market, we round up the best around, including some more established models
    Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

    Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

    The former Australia coach on why England must keep to Plan A, about his shock at their collapse Down Under, why he sent players home from India and the agonies of losing his job
    Homelessness: Why is the supported lodgings lifeline under threat?

    Why is the supported lodgings lifeline under threat?

    Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
    A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

    A History of the First World War in 100 Moments

    When the world’s biggest shed took over Regent’s Park
    The pain of IVF

    The pain of IVF

    As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal