Standard Life's bet - that the stock market would provide the returns needed to meet guaranteed annu...
Standard Life's bet - that the stock market would provide the returns needed to meet guaranteed annuity rate promises - has backfired because of an excessive equities weighting in the face of a prolonged bear market, says consultant Ned Cazalet.
Cazalet does not say, as some have suggested in the weekend press, that the company has to dig up £2.5bn in cash to pay its GAR policyholders.
What he does say is that the reliance on equities in the past two years has eaten into capital reserves to the extent that even a slight recovery in the stock market this year is not going to reverse the losses.
"It's basically an asset allocation story" says Cazalet.
"If we take a book of business of, say £10bn paying 4% per year, then the company has been forced to pay out £800m in bonuses in the past two years. But because of the asset allocation of the with-profits fund, there is a gap of about £2bn," he suggests.
"The performance of the fund has been more like -10% and -12% over the past two years, which has created the gap because it is not enough to cover guarantees of 4% [for two consecutive years]," adds Cazalet.
Some 40% of the £30bn with-profits fund is 4% or 3% payment to GARs, which is a much higher ratio than most, Cazalet says.
Standard Life says it has more than £5bn in capital to support its case, but the company's sums do not add up, argues Cazalet.
He adds that the case is made worse by the fact the company's financial year ends in November, and the FTSE has gained less than 1% since that month last year.
There is, however, some positive news for non-GAR policyholders.
"We're not quite at the point where the buffer between GAR and non-GAR policies is gone," Cazalet says, indicating that while the excess capital has been eaten into, there is still enough remaining, at least for this year.
Standard Life has been allocated about nine pages of Cazalet's 700-page annual report into the life industry, which is due in the next couple of weeks, suggesting that it is not the only company facing difficult decisions.
For now, Cazalet says the company faces the tough choice of changing its asset allocation in order to meet guarantees to customers.
What made financial headlines over the weekend?
290,000 already affected
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension