Jeremy Warner's Outlook: A harsh reality dawns at proud Standard Life

Bernie's Grand Prix
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The Independent Online

Standard Life's fall from grace is proving a long and painful one, so painful, in fact, that Sandy Crombie, the Edinburgh life assurer's chief executive, left it to one of his juniors yesterday to field questions on the latest raft of nasties. It's never easy to reconcile yourself to a harsh, new reality, but Standard Life seems to be making particularly hard work of it. The company had to be dragged kicking and screaming by the Financial Services Authority into adopting new, "realistic" solvency requirements and it took the life assurer four years to accept the inevitability of conversion from mutually owned status to plc. Now three other relics from its mutual past, where customers were meant to come before profits, are being thrown out the window.

Standard Life is following Aviva and others into introducing a time bar for mis-selling complaints on mortgage endowment policies. More significantly, it has decided to renege on its promise to meet endowment shortfalls and it intends to accelerate the move towards payouts which better reflect the policy's asset share, or the value of the underlying investment. In layman's language, that means lower bonuses.

All these decisions should have been taken ages ago. For some policyholders, they are plainly bad news, another kick in the teeth, yet for the life fund as a whole, they are the right thing to be doing. It is only fair that those who believe they have grounds for a mis-selling complaint should act on it within a reasonable length of time, otherwise there is a danger of policyholders hedging their bets until just before maturity to the disadvantage of other life fund members.

Likewise, the conditions attached to the endowment "promise", in particular the achievement of a 6 per cent annual return on capital, have not been met for some years now. To make up the shortfalls, Standard Life would thus have been forced into an ever more aggressive reserving policy, already running at £100m a year, again to the disadvantage of other life fund members. The same goes for the overpayment of bonuses. If, as a part of the "smoothing" process life funds adopt, the company guarantees too much in the way of annual bonuses, then ultimately the money will have to come from someone else's pocket.

Some policyholders will regard yesterday's dose of medication as the inevitable result of the decision to convert. As a mutual, Standard could afford the luxury of indulging its customers in a way proprietary companies could not. Now that Standard must make a profit and pay a dividend, there will be less money to service policyholders' needs. The best they can hope for is that the demutualisation windfall goes some way to compensating them for the disappointment of their policies.

Yet that's not really the right way of looking at it. Standard Life is being forced into these climbdowns not because it is demutualising, but because it over-promised in the past. It also made some terrible investment judgements, in particular its decision to stay hugely overweight in equities through one of the most serious bear markets in recorded history, thereby transforming a mountain of excess of capital into the molehill it is today.

Standard Life is still a strong and resilient brand, but yesterday's announcements, necessary though they were, will scarcely have helped its cause. Yet more reputational damage is just what Standard Life didn't need. Policyholders can only hope that all the bad news is now out in the open. Otherwise Standard's life as a quoted company is likely to prove, in the words of Thomas Hobbes, nasty, brutish, and short.

Bernie's Grand Prix

What Is it about Bernie Ecclestone (Formula One's commercial supremo) and Labour governments? Early in the Blair administration's rule it was embarrassingly revealed that the Labour Party had taken a £1m bung from Mr Ecclestone at a time when it was thinking about banning tobacco companies from all sports sponsorship - then a key source of income for F1. Later, Mr Ecclestone was granted an exemption from the ban after threatening to quit Britain.

Now, with Mr Ecclestone once again threatening to take the sport elsewhere, the Government is considering a package of measures that would enable Silverstone to meet Mr Ecclestone's demands for more money. Use of taxpayers' money is ruled out, insists Richard Caborn, the sports minister, but what else do you call the incentives being arranged for Silverstone through the East Midlands Development Agency? Government subsidy for a commercial endeavour is rarely ever a good idea, but it is hard to imagine a less deserving cause than F1, a fabulously lucrative sport that has made Mr Ecclestone one of the richest men in Britain.

The affair is more complicated than it seems, so pay attention. On the face of it, the argument is about a "mere" $5.1m. Mr Ecclestone originally wanted Silverstone to pay him $15.9m to bring F1 to Britain next year; Silverstone has offered him only $10.8m. Mr Ecclestone later slightly eased his price, but insisted on a 10-year deal whose value would inflate by 10 per cent a year. Silverstone has stuck to its original offer adjusted only for the rate of inflation in subsequent years. No deal, says Mr Ecclestone.

Enter Brand Synergy, which says it can meet Mr Ecclestone's terms providing the British Racing Drivers' Club (BRDC), Silverstone's owner, agrees to sign up to its terms. Brand Synergy is run by a former freelance journalist (not a ringing endorsement) and occasional dabbler in motor sport deal making, Kim Cockburn.

Yet there's more to her bid than meets the eye. For reasons that remain a complete mystery, she enjoys the backing of Mr Ecclestone, who regards the BRDC as a bunch of amateurs. She's also signed up Nigel Mansell, the former F1 champion and, more importantly, Quintain Estates, the property company which is redeveloping the area around Wembley Stadium. The idea is that they would provide the money and the know-how to redevelop Silverstone into a 21st century circuit.

The BRDC none the less remains suspicious. Based on previous experience, $10.8m would be the most they could pay without making a loss on the event. This is a good deal less than other countries pay Mr Ecclestone for hosting F1. However, Mr Ecclestone has already been paid once for his services. In an act of bubble-induced madness, the advertising giant Interpublic some years ago bought the rights to host F1 at Silverstone years into the future. Its hubris didn't end there. Egged on by Sir Frank Lowe, then a board member, it bought a number of other British race circuits alongside.

Needless to say, the whole thing was a disaster and it ended up costing Interpublic $93m to buy Mr Ecclestone out from the contract. Sir Frank paid for the débâcle with his job. The upshot is that technically speaking Mr Ecclestone has already been paid up until 2010 to stage Formula One at Silverstone, though admittedly with someone else's money. Add that money back in, and Mr Ecclestone gets far more out of Silverstone than any other race in the calender.

I have to confess to regarding the whole Silverstone row as just part of a familiar pattern of publicity seeking razzmatazz. There would be much sound and fury, and ultimately Silverstone would host the race as usual. But actually it is more serious than that. Mr Ecclestone has 19 circuits signed up for next season together with a queue of other countries just dying to join the calender, but only 17 races to run. At least two circuits have to go, and at the moment it looks like being Silverstone and Paris.

Still, it remains hard to believe Mr Ecclestone will push the destruct button. Britain is the spiritual home of F1. It's where the sport's core support is, and it is the place where large parts of the industry base themselves. With or without Brand Synergy, a deal will eventually be done. F1's contract with the teams, without which there would be no sport, is up for renegotiation in three years time, and few would be happy with a calender that excludes Britain. Like it or not, Mr Ecclestone must continue to talk to the BRDC's "men in blazers".

jeremy.warner@independent.co.uk

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