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Insurance group Aviva came under fire today after it slashed a cash windfall for 1 million customers by half.
Under a deal to distribute funds in its so-called “orphan estate” — money which has built up over decades in its with-profits funds and is surplus to requirements — customers will get payouts of between £200 and £1150.
That is less than half what customers were offered before stock markets were buffeted by the banking crisis, and insurers' balance sheets began to look shaky.
Eligible customers hold Commercial Union Life, CGNU and Norwich Union Life with-profits policies which must have been in force on 21 November 2006 — the day the company embarked on the scheme.
If the policies have matured since that date, the payout will still be made.
How orphan estates are divided between shareholders on the one hand and customers on the other has always been contentious.
Consumer groups say policyholders should get 90% of the cash.
Often an insurer will offer less than that, giving the policyholder the chance to turn down the cash and stay with the fund in the hope of a higher payout later.
But Mark Hodges, chief executive of Aviva's UK life business, said: “We believe that giving customers the opportunity to benefit from a reattribution is the right thing to do.”
Consumer body Which? blamed the Financial Services Authority for allowing Aviva to give such a paltry windfall. Chief executive Peter Vicary-Smith said: “Policyholders will be disappointed by the cut in the payout. The FSA's continual failure to defend policyholders' interest has cost them a substantial amount of money.”
He also accused the regulator of “looking the other way” while Aviva's orphan assets were “plundered” to pay shareholder tax bills, subsidise new business, pay mis-selling compensation costs and prop up the company's pension deficit.
Aviva argued that those claims were misleading, adding that it is fair for existing customers to shoulder some of the burden of winning new business because they benefit from it.
Clare Spottiswoode, the former gas regulator who was appointed to represent policyholders in the negotiations, said of the deal: “This is good news for policyholders after the turmoil in the financial markets that affected the plan announced last year.”
Aviva could pay out a total of £500 million rather than the £1 billion it previously agreed.
That leaves Spottiswoode open to the criticism that she should have moved more quickly to agree a deal, although her supporters argue she could not have foreseen the meltdown in the financial markets.
Aviva insists that its own strength is not affected by this deal but if the value of the orphan estate drops below £1.2 billion even the new deal could be ditched. Today it stands at £1.4 billion.
Reader views (9)
The Aviva website boasts the headline "2008 preliminary results: Aviva remain financially strong after a solid performance in a challenging year". Is this another myth??
In the good times it seems the 'fat cat' managers of the insurance companies and banks get the bonuses: in the lean times the policyholders are clearly expected to shoulder the burden of the downturn.
When exactly are these 'managers', the FSA, Ms Spottiswoode et al going to protect the policyholders, the people who generate the money they fritter away?
This deception is a national scandal. Policyholders were told last year that we would be receiving a bonus at a certain rate. Does this not constitute a written contract with the policyholder?
Are there no honourable people left in the financial industry in this country whose word is their bond?
- Long-Term Policy Holder, North east, UK, 12/05/2009 17:10
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Years ago I stopped paying into a NU pension scheme because the return was so poor, but bought some discount share that it entitled me to, because it was clear that NU was better at making money for its shareholders than its policyholders. That held true for quite a while, but it's fallen apart in recent years.
Basically, there's a fundamental conflict of interest in such a set-up: if you reward the shareholders, you short-change the policy-holders, or vice versa. Another argument for mutual funds.
- Mdj E10, london uk, 07/05/2009 17:33
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The Inherited Estate is invested identically to the rest of the With-Profits fund, so it should perform identically. Aviva published the value of the Inherited Estate at £5.4bn on 30th June 2007. The cost of the Special Bonus is £2.4bn in total, which was removed on 31st December 2007. That should leave £3bn in the inherited Estate. I have it in writing from Aviva that the annual net return for the With-Profits Fund in 2007 was +4.8% , so the inherited estate should be valued at £3bn on 31st December 2007. The Fund made a loss of -11.9% in 2008, therefore the Inherited Estate should be valued at £2.643bn, and not £1.4bn. Why is there an apparent shortfall of more than £1.2bn?
How can a so-called "advocate" manage to agree a deal in July 2008, worth 47.61%, and then renegotiate this so that it is now worth just 41.66% (based on Aviva's figures)?
Policyholders are being preyed upon by financial vultures whilst we're held down by Spottiswoode and the FSA. It is a national scandal!
- Disgusted, Midlands UK, 07/05/2009 10:13
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A very fair summary of the situation from Simon English.
It is so obviously poor customer relations to put shareholders' interests before those of the investors. I am unlikely to invest in Aviva again.
Ms Spottiswode has not served us well and should consider her position
- Aviva Policy Holder, Staffordshire, 07/05/2009 08:39
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Once again the punter gets the short end of the stick from a high street pension fund or endowment fund. They always seem to operate a few steps behind everyone else (except their hapless clients), buying high and selling low. Who are the canny opposite parties, buying low and selling high? Is there a mirror world of fund managers' personal funds ever ready to oblige?
- Bloke, London, 06/05/2009 16:52
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I would not have expected Jonathan Haslam to say anything else having been in the employ of Ms Spottiswood as head of communications (have a look at the website http://www.policyholderadvocate.org and there he is listed in her team. Sorry, Jonathan, but your loyalty is misplaced. The job should have been finished in early 2008 well before the credit crunch started in earnest. Ms Spottiswood and her team (including Jonathan) have benefitted from at least another 15 months' worth of income at the expense of the Aviva shareholders and policyholders. Her prevarication is well documented on her own website and her actions are indefensible.
- Rick, Ipswich, UK, 06/05/2009 15:21
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It is good news policyholders get a choice, but absolutely daft to suggest Clare Spottiswoode is at fault for the length of time it takes to get a deal finished. Once a deal is announced it taken about six months to go through all the legal processes, including a High Court hearing, before cheques can out. None of that is in Clare Spottiswoode's control. No one could foresee the market collapse last October that scuppered the first deal. That includes all the market analyst 'expert' critics who believe in 20/20 hindsight.
- Jonathan Haslam, London UK, 06/05/2009 12:36
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So Clare Spottiswoode dragged out the settlement for an extra year, in which she picked up an additional 250k in salary. Bet she got a bonus for getting the policyholders half of what the company offered last year as well....
- Mark, London, 06/05/2009 12:21
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Well done to them, for about 15 years Prudential has been talking about its multu million (possibly billions) pound orphan fund how much longer do they need?
- Mike, London England, 06/05/2009 11:19
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