Through the Looking-Glass: Assets in Wonderland

Lewis Carroll should have worked in life assurance. "Orphan assets" is the latest adventure in Wonderland that this particular branch of the personal finance industry has arranged for us. They are, crudely, a sort of contingency fund that looks as though they will not be needed and could now safely be distributed. The tricky bit is working out to whom: hence the nickname. The Consumers' Association has taken an interest in the proposals by the insurance company Axa to deal with its orphan funds. The CA thinks that too much is being given to Axa's shareholders. Axa disagrees and will fight them in court.

Lewis Carroll should have worked in life assurance. "Orphan assets" is the latest adventure in Wonderland that this particular branch of the personal finance industry has arranged for us. They are, crudely, a sort of contingency fund that looks as though they will not be needed and could now safely be distributed. The tricky bit is working out to whom: hence the nickname. The Consumers' Association has taken an interest in the proposals by the insurance company Axa to deal with its orphan funds. The CA thinks that too much is being given to Axa's shareholders. Axa disagrees and will fight them in court.

One can imagine how the conversation might go with a bemused Alice if she were to stumble into the court room and encounter the gaggle of executives, actuaries, lawyers and regulators upon whom we rely to settle these matters for us.

"What are you doing?" Alice might ask. "Arguing about orphan assets." "Who do the assets belong to?" "No one." "So what are you going to do with them?" "We're going to give them to those who own them." "Who are they?" "We don't know." "So what will you do?" "We'll give some to the life policy holders and hand the shareholders the rest." "What will happen to the money for the policy holders?" "They can have about £400 now, or opt for something - maybe nothing - in the future." "And so shareholders get a windfall?" "Oh no, the shareholders' money will be reinvested in the business, which might make more profits for them in the future." "Does any one understand this? "Not really." "Can they explain it?" "Certainly not! See you in court!"

It should not be decided in court. First, Axa is looking only at an interim solution (although if your policy expires before any final settlement it won't be interim for you), so it is unfair to some policy holders. Second, because even if the Axa case is satisfactorily resolved, there are many more companies, like the Prudential and CGNU, with even bigger orphan assets which will have to go through similar processes but with potentially different outcomes.

The Treasury's well-established guidelines state that 90 per cent of orphan funds should go to the policy holders. This seems fair and sensible. But such guidance seems to have little effect in practice, and certainly not in the case of Axa. The sums of money are too great and the principles too important to be left to the courts. It is a case for legislation. And some hard homework for all those involved.

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