Law Firm Irwin Mitchell is seeking a legal opinion on a potential case against Resolution Life on behalf of former endowment policyholders with Royal & Sun Alliance.
The firm says certain groups of policyholders with Resolution are being disadvantaged by the so-called 'zombie fund’s' exercise of discretionary investment powers.
Alan Owen, partner at Irwin Mitchell, says by its own admission Resolution Life “hypothecates” which he defines as “giving different groups of policyholders a different mix of assets - without seeking explicit policyholder approval”.
Essentially, what this means is Resolution appears to be taking asset allocaton decisions on behalf of policyholders to ensure they receive the sum assured on their investment but without informing those policyholders it is doing so. Allegedly this has meant policies, while providing the sum assured, are actually underperforming.
Owen says while such actions may be covered by the small print in the wording of the policy the way in which Resolution may be exercising any discretion “could be unlawful, as was found to be the case with Equitable Life”.
He says Resolution “hypothecates” on two bases – how close the policy is to maturity and the level of guarantee contained within the policy.
It is the law firm’s belief that certain groups of policyholder may, as a result, be disadvantaged and may have cause to seek legal redress.
The key groups of policyholders affected, says Owen, are likely to be those with fairly generous guarantees, such as those with Royal & Sun Alliance Life & Pensions whose pension policies started after 1994.
Owen suggests Resolution decided that those with the most generous guarantees – where an annual investment return of over 7.5% is required for the maturity value to exceed their guarantee – should be denied any investment in equities and property.
Irwin Mitchell suggests this decision, alledgedly taken in January 2004, means there are potentially hundreds of policies that will have underperformed their notional “non-hypothecated” equivalent by around 23% by the end of this year.
It says the "hypothecation by guarantee" is applied in several ways. If a policyholder’s asset share is sufficiently below the sum assured - including regular bonuses - that they would need to have a return on their investment of more than 10% per year in equity and property for their asset share to exceed the sum assured, then they will instead receive an allocation of 100% fixed income in order to meet that target.
If the policyholder’s required return is between 5% and 10% per year then they will receive a reduced allocation of equity and property.
If the required return is below 5% then the policyholder will receive the full allocation of 50% equity and property.
The problem, says Owen, is if the stockmarket grows all the gain goes to those with less valuable guarantees at the expense of those with more valuable guarantees. So a policy with a 3% return will have a much greater exposure to risk than a policy with a 7% guaranteed return.
But Justin Modray, head of communications at Bestinvest, says a lot depends on the number of policies and when exactly they are due to mature. Modray points out that many of the funds that Resolution has bought were in danger of failing to provide the returns they had promised policyholders in the first place and were already invested heavily in fixed income.
Modray argues Irwin MItchell is trying to suggest that policyholders have "jumped out the frying pan and into the fire when the frying pan was pretty bad in the first place."
He adds that is it unlikely a strong case could be brought against Resolution unless it could be proven that Resolution was being overly cautious in its approach to asset allocation.
If, for instance, Resolution had reduced the exposure of policies to equities and property that still had around eight to ten years to go before maturing, it might be viewed as being excessively cautious, hence not acting in the best interests of policyholders. Modray compares that against caution taken on policies with, say, five years until maturity, in which case it would be unlikely Resolution would be viewed as acting irresponsibly.
A spokesman for Resolution says the company's decision to switch policies that are nearing their maturity date to fixed income is a responsible move to protect the policyholder's investment.
He says Resolution only makes such a decision when the policy is within a couple of years of maturing adding: "Policyholders would be pretty upset if we were to lose the gains those polcies have made and we are satisfied that what we are doing is correct on the basis of the legal advice we have been given."
Resolution also claims it is not alone in acting in this way as the spokesman adds: "We are interested to see that we have been singled out but beyond that we are quite comfortable with the legal advice that we have had."
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].IFAonline
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