Abbey shareholders assured no need to plug life funds further

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The Independent Online

Abbey National, the UK's sixth largest bank, allayed investors' fears over potential liabilities from its life funds yesterday, announcing that after a series of discussions with the Financial Services Authority, it had been assured it did not need to make any further provisions.

Abbey National, the UK's sixth largest bank, allayed investors' fears over potential liabilities from its life funds yesterday, announcing that after a series of discussions with the Financial Services Authority, it had been assured it did not need to make any further provisions.

The bank has set aside £1.6bn to support its Scottish Mutual and Scottish Provident life funds over the past three years, in a bid to satisfy FSA guidelines over its solvency position. However, analysts had speculated that with new stricter rules to be implemented by the end of this year, Abbey would have to make additional charges against its earnings.

News that the company now had its solvency position under control sent its shares up more than 2 per cent to more than 500p in early trading. However, the shares fell back to close up 0.5p at 490.5p, giving the company a market value of £7.23bn.

In a statement, Abbey said: "There is no incremental capital need or adverse charge to profits, over and above that which has been previously reported in Abbey's life businesses, as a result of this review. At the same time, the capital structure of the life businesses has been reorganised, allowing the contingent loans to be repaid. Significant unallocated capital remains at present in the businesses."

It added: "As a result of the conclusion of the review, Abbey's customers will benefit from greater clarity on the management of the funds."

With its solvency position stabilised, Abbey said it would now increase the equity weightings in its with-profits funds from 28 and 24 per cent, to 35 per cent, and would allow investors in its Scottish Mutual with-profits funds to switch to other internal funds without incurring a surrender penalty. It said that most policyholders would see no further adjustments to terminal bonuses, although "modest" cuts would be announced for conventional Scottish Mutual with-profits holders.

All of Abbey's life funds have been closed to new business over the past few years, and it is believed the group is keen to find a buyer for the package - a move which would release about £1bn of unallocated capital. However, analysts reiterated that Abbey had not been and was not yet in talks with any party regarding a potential sale of the funds.

The group as a whole has also been the subject of take-over speculation in recent months, with reports that Abbey rejected a bid from Spain's Santander Central Hispano bank earlier this summer. With all major UK banks likely to be prevented from buying Abbey due to competition rules, analysts believe the chance of another imminent bid at the current share price remains unlikely.

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