Life funds on brink of breaching solvency limits, claims study

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The Independent Online

A number of life assurers have almost no extra assets to bolster themselves if markets take a further nosedive and many are relying on future profits to shore up reserves, according to a comprehensive survey of the industry published today.

A number of life assurers have almost no extra assets to bolster themselves if markets take a further nosedive and many are relying on future profits to shore up reserves, according to a comprehensive survey of the industry published today.

Pearl, which is owned by the Australian giant AMP, was at one point relying on future profits so heavily that if they were stripped out, the fund breached the minimum solvency required by law, according to Money Marketing Online, which conducted the study into life assurers' financial strength.

Funds which have relied entirely on future profits to remain solvent in the past include Equitable Life, which was forced to shut to new business, and Scottish Mutual, which received £150m from its parent Abbey National to bolster reserves.

AMP, headed by Tom Fraser in the UK, insisted Pearl was stable and revealed that two weeks ago it injected £400m into its life funds.

The company tried to calm fears that the weakened state of the fund would mean broad cuts to policyholders' annual and terminal bonuses. A spokesperson said: "Pearl is backed by AMP, a £7bn international financial services company, which has better diversification in terms of assets and geography than many of its competitors."

The Financial Services Authority allows life offices to take future profits into account when calculating their solvency. But the increased reliance on the device has raised concerns about how robust life assurers are.

The Money Marketing survey, compiled with KPMG, was based on companies' financial returns until the end of 2001. It showed a number of large companies including Aviva, the recently renamed CGNU, and Royal & SunAlliance, used future profits to boost their free asset ratio, the money companies hold as an extra cushion above their basic solvency margin.

Excluding future profits, free asset ratios almost halved, from an average 9.6 per cent at the end of 2000 to 5 per cent in December 2001. The ratio is likely to have fallen further in the past few months as markets dropped.

Mike Urmston, Aviva's chief actuary, criticised the way solvency is calculated. "It is not very flexible or realistic. We have £5bn of orphan assets which we cannot use but which are actually there to support policyholders. Using future profits is a way to avoid being forced to sell shares in a falling market. It is sensible and it doesn't cost policyholders anything," he said.

Separately, the latest CAPS survey of pension funds also painted a gloomy picture, showing that funds investing in a mix of stocks and bonds lost 8.6 per cent of their value in the three months to the end of June.

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