Aviva is sending clients letters explaining there could be additional financial incentives in the future for policyholders of the CGNU and CULAC with-profits funds if the firm decides to claim its orphan assets.
Leaflets and letters are only being sent to those customers who contact Norwich Union’s associated offices because they are considering transferring or switching monies from the two CGNU Life and Commercial Union Life Assurance Company with-profits funds.
Background information is being sent to policyholders, who are considering a switch out of these two with-profits funds, as part of an Aviva ‘treating customers fairly’ programme to inform customers inherited estates – otherwise known as orphan assets – could in future be ‘reattributed’ or redistributed by the life company for the benefit of both policyholders and shareholders.
Were this to happen, eligible policyholders might therefore see a “financial incentive” in return for the loss of rights to payouts from the inherited estate in the future so NU is warning consumers in its background guidance “changes made to your with profits policy now may affect your future eligibility for any financial incentive, or the size of it”.
News of Aviva’s interest in gaining access to the funds’ orphan assets was first unveiled by Aviva in 2005 when the company said it was continuing to review the surplus assets of the fund, but gained more momentum earlier this year following the appointment of Clare Spottiswoode, an independent policyholder advocate who would look at any proposals tabled by the firm.
Should NU decide to use the orphan assets, Spottiswoode would be tasked with ensuring any deal is in the interests of policyholders today and in the future.
Aviva and Norwich Union stress within guidance letters sent to clients no decision has been made on whether or not to proceed with plans for the reattribution of assets and any such move would require FSA approval.
But these documents at least prepare policyholders for the prospect of such a move, suggests Ned Cazalet of Cazalet Consulting, as NU needs to ensure clients who do decide to withdraw monies from the with-profits funds were given plenty of advance warning of the possible development, in order to prevent claims for compensation, should the company eventually decide to proceed with a reattribution of assets.
“The reason Aviva is making the move is for TCF reasons. If Aviva put a circular out tomorrow on reattribution, a policyholder could argue the firm knew there was some prospect of this happening some way in advance and they would now have cashed their policies in. [Aviva] would want to give [policyholders] as much information as possible as policyholders need to be mindful something may be afoot. TCF is the driver behind the letters,” says Cazalet.
The matter of who owns these surplus or ‘orphan’ assets – shareholders, policyholders and at what percentage - has been hotly debated for many years because there are no rules to say who the funds belong to.
Axa is the only company to have successfully claimed the orphan assets of its life company for the benefit of shareholders and policyholders and on that occasion, the £1.7bn estate was split 45:55 between the two groups.
Inherited estates tend to have acquired over the years where policyholders have not claimed their monies and where surplus funds from annual returns have left within the fund to cover the smoothed liabilities of the with-profits fund for future potential payouts, but a life assurance company is restricted as to how it can use these assets because they are technically owned by the fund’s policyholders rather than the company.
Should NU decide it would like to pursue a claim for the assets, it will have to show there would be no consumer detriment to existing policyholders, as well as setting aside sufficient capital reserves to secure the future of the fund.
Financial advisers point out it is difficult to advise consumers at this stage as to whether or not they should remain within the funds as there is no information about the size or financial stability of the fund, as well as the incentives for loss of policyholders rights to estate asset in the future.
Justin Modray, head of communications at Bestinvest says the only way to make a valid judgment on whether to stay with the fund – given the potential prospect of a windfall payout in the future – is to know what the fund is worth and how much will go to policyholders.
“You can never get an exact breakdown of what is going to be earned from with-profits, particularly as last year with-profits [funds] returned 16-20% while bonuses were between 0-4%. In order to make the assessment, you would want to see some hard facts and figures to give confirmation of the value of the assets so it is impossible to give guidance on the moves at the moment,” suggests Modray.
At the same time, however, NU’s decision to provide policyholders with information is the right thing to do, says Tom McPhail, head of research at Hargreaves Lansdown.
“They are doing the right thing by informing anyone who is thinking of moving money out of the funds. I appreciate it takes a lot of time to explain the issues because it does require further policyholder advice. But it is not unreasonable to say to clients they should be aware,” adds McPhail.
Details of the NU policyholder insert state any further announcement on the issue of inherited assets is not expected before autumn 2006.IFAonline
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