L&G's £18bn with-profits fund may close as solvency rules bite

David Prosser, the chief executive of Legal & General, said he may close the company's £18bn with-profits fund as a result of new solvency tests. He also said the move to realistic reporting would be the death-knell for the £380bn with-profits savings industry.

His comments came ahead of what is expected to be a tough grilling by MPs, who are demanding to know why with-profits investments have let so many customers down. One MP said he expected "plenty of fireworks" at today's Treasury Select Committee.

Alongside Mr Prosser, Sandy Crombie of Standard Life, Richard Harvey of Aviva, and Jonathan Bloomer of Prudential will all try to explain why millions of savers have with-profit endowments that are set to fall short of the mortgage they were designed to pay off.

Mr Prosser will be quizzed over revelations that senior executives of Legal & General were aware of the shortcomings of endowment policies two years before they were withdrawn from sale in 2000.

Reporting that sales for the group were down 2 per cent for the year, Mr Prosser said he is now reviewing whether to continue selling any new with-profits business in the light of demands of the new solvency regime for insurers and new rules for managing with-profit funds. With-profits - a pooled fund of equities, bonds, cash and property that smoothes payouts to cushion the blows from stock markets - require substantial capital backing and the new regime insists that companies reserve in full for all guarantees. The Financial Services Authority has also been trying to improve transparency in the arcane world of with-profits investments for the past three years, as well as introduce new solvency tests.

"The changes to transparency from the FSA and the Sandler review and the new reserving requirements spell the end for with-profits. A with-profit contract has lots of free benefits and guarantees - these are quite expensive to reserve for in the new realistic rules. Whether with-profits can continue to be provided is a big question and we will be looking at it in the next six months. Lots of people in 2004 will be reviewing their position," Mr Prosser said.

Equitable Life, Royal & Sun Alliance, Britannic Assurance, NPI, Pearl and Scottish Mutual have all closed to new with-profits business in recent years to conserve capital. The new rules have caused rival insurer Standard Life such serious problems in finding capital for its guarantees that it is now considering a stock market float.

Around 10 per cent of L&G's new business during 2003 was with-profits, down from around 15 per cent in the year before. With-profits has been at the heart of the insurance industry for centuries. But the sector has come in for criticism recently for its opacity and millions of policyholders have seen their payouts cut. Unit-linked policies, which move in line with stocks, have become more popular.