Outlook: Pitman's gain in Widow's marriage

THIS MAY not quite mark the death of mutuality - Standard Life and the beleaguered Equitable insist they will continue to keep the flame alive - but it is a pretty severe blow. Scottish Widows was meant to be one of the chosen few, a committed mutual able to beat the proprietary companies not only on costs and investment performance, but on marketing acumen and sales growth too.

These boasts may always have been more hype than reality, but it is certainly true that Scottish Widows has largely managed to steer clear of the pensions mis-selling and guaranteed annuity debacles, and this in itself must be a sign of a well run business. Add that to the mutual benefit of not having to pay dividends to shareholders, and Scottish Widows, like the other two standard bearers, has in the past been able to make a compelling case for not converting.

So why has Mike Ross, the staid Scottish actuary who runs the Widows, changed his mind? A cynic would suggest it is the prospect of becoming deputy chief executive of Lloyds TSB and the top drawer plc remuneration package that goes with it, but this would surely be unfair. Mr Ross claims to be genuinely convinced that he will serve his customers best by being part of a larger group.

So let's examine the proposition. Are customers, the present owners of Scottish Widows, best served by selling up to Sir Brian Pitman?

On the face of it, the price compares favourably to other converted assurers, though there are caveats. The cash in hand to members is only pounds 5.7bn, not the pounds 7bn headline figure. The difference is made up with members' own money, which is being transferred from reserves to be paid out over time in policy holder benefits. Others less inclined to give Mr Ross a big job, or to dress up the takeover in tartan colours, might have been prepared to pay more. Scottish Widows might also have obtained a greater value by floating first, as Norwich Union did.

There are other question marks too. As always with demutualisations, the division of spoils looks arbitrary. Those with PEPs, ISAs, bank and credit card accounts get nothing at all, while investors unlucky enough to have been sold a unit-linked as opposed to with-profits policy will receive only pounds 500. The lion's share of the proceeds goes to with-profits members, based on policy values and duration of membership. Again it could be argued that this weighting to longevity of policy is in itself unfair, since those getting the most are also the ones that have had the greatest mutual benefit. More recent members are being asked to give up their rights of ownership for comparatively little.

The question of whether members are selling for too little is one thing. There's also a price for selling at all - the 10 per cent of all future profits that will from now on go to Lloyds TSB shareholders. Mr Ross believes the potential offered by Lloyds for creating a business capable of achieving greater sales at lower unit costs will far outweigh this loss of mutual advantage to policyholders, but the proposition remains to be tested.

All this said, the chances of Lloyds being gazumped don't look high. Even for a company as big as Lloyds, pounds 5.7bn in cash is hardly loose change. Others would be hard pressed to pull such a sum out of the kitty. As for Lloyds, Widows is a neat bolt on acquisition which consolidates the bank's position as the most advanced retail financial services conglomerate in Britain. But it is not the deal that in itself will breath new cost cutting life into earnings. The big one has yet to come.

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