64. The process of demutualising a life assurance
office is different from a building society. Generally a 75 per
cent majority is required, but there are no turnout requirements.
However, a court hearing is required. Standard Life suggested
that there should be a turnout requirement for a members' resolution
65. Although Mr Frazer drew our attention to eight
occasions when mutual life assurance offices had demutualised
Mr Ian Lumsden, Group Finance Director of Standard Life, said
that they had not been under pressure from members to do so: "I
am not going to say it could not happen; there has been a lot
of speculation in the press in the last couple of days about the
windfalls which could be obtained ... we have a little experience
of surges in small policy sales. That said, we have had no suggestion
ourselves of any kind of wish on the part of our members to take
that line and no suggestion of anybody wishing to stand for membership
of our board with that purpose".
66. Mr Lumsden estimated that demutualisation would
result in a 1 per cent reduction in return, suggesting a decrease
from 10 per cent to 9 per cent,
and that on average mutual life companies had paid 5 per cent
more in maturity values and fewer of their policies lapsed before
67. Mr Lumsden said that "the demutualisations
... have usually been to obtain more capital", but pressed
for the court approving a demutualisation to "take into account
the interests of the future members so that if the plan shows
for example lower costs as a result of the demutualisation and
merger with another organisation, that may well be in the interests
of the future, since the lower costs may outweigh the shareholders'
68. The Treasury said that "the decision whether
to retain mutual status is for the members. The regulator's main
- that the proposed change of status should not
put into doubt the insurance business' ability to meet its liability
- in the case of a long term insurance business,
to ensure it can fulfil the reasonable expectations of policyholders."
In the case of a life office, this involves a report
by an independent actuary, of which a summary has to be sent to
policyholders, on whether policyholders' interests will be protected.
69. The current legal requirements for conversion
appear to relate only to the interests of existing policyholders,
and Ms Hewitt confirmed that the Government's view was that the
current members were the beneficial owners of the organisation.
We asked to what extent the interests of future policyholders
were recognised in law. Mr Bill Cooper of the NFU Mutual said:
"where the concept of the interests of future members appears
in law is in the directors' fiduciary duty to the members. That
duty is owed to present and future members".
Mr Andrew Young, also of NFU Mutual and representing the Mutual
Insurance Companies Association, claimed that "it cannot
be right that assets which have been built up over ... two hundred
years in some cases ... can be taken by one generation and future
generations denied the benefits of mutuality. ... I think the
relationship the members have to the assets is more akin to that
of trustees who are there to make sure that the assets are employed
for the purposes for which they were intended, for the present
and for future generations". Demutualisation should be an
option only if members believed that they would receive superior
value for money for their policy under a different corporate structure,
rather than because of any windfall.
70. We believe that there is a need for a higher
level of participation by policyholders in the corporate governance
of insurers, and that insurance companies should take steps to
bring this about. In addition, the Financial Services Authority
(FSA) should rigorously police whether insurance companies are
informing their policyholders of substantial changes in policy.
71. Although there has been little activity by "carpet-baggers",
there have been several high-profile takeover bids recently, such
as that by Lloyds TSB for Scottish Widows. We believe that
the FSA should scrutinise all demutualisation proposals to ensure
that they are proper to be put to policyholders. In addition,
consideration should be given to competition law, and whether
the situation of mutual insurance offices should be considered
by the Office of Fair Trading.
OTHER ISSUES RELATING TO LIFE ASSURANCE
72. "Orphan assets" or "free assets"
are the reserves of a life office which are not expected to be
needed to maintain returns on investments (which are smoothed
from year to year) so that policyholders' "reasonable expectations"
are fulfilled. The amounts of such assets vary greatly between
societies, and for mutual offices they belong to the policyholders.
However, they have been built up not only from the current policyholders
but also from previous ones, often over more than a century. We
reported in our report The Mis-selling of Personal Pensions
that these assets might need to be used to pay the compensation
for pensions mis-selling. We recommend that the FSA should
be required to rule on the meaning of the phrase "policyholders'
73. Standard Life told us about proposals that, for
stakeholder pensions, a maximum level of administrative charges
would have to be guaranteed. They pointed out that, in a mutual
organisation, the costs of honouring this guarantee (if administrative
costs would otherwise be greater than allowed) would fall on the
remaining with-profit policyholders. Mr Lumsden said: "What
we said in regard to the cap on the stakeholder pensions was that
if such a cap were to become a requirement generally in our business
then it would be difficult for a mutual company to comply with
it because the policyholders ultimately take the risk of the company's
inability to meet those standards. In other words, if it costs
us more than one per cent per annum to administer this, somebody
is going to have to pay and it is going to have to come out of
the bonuses for policyholders.
Mr Young identified a view that there would be a need for "considerable
economies of scale before any company can live in that marketplace".
121 See evidence, p 31, para 3.3 and p 33, para 15. Back
p 31, para 3.4. Back
Frazer, Op. cit., p 27 (but two of these Mr Frazer categorised
as "rescues"). Back
p 100, paras 8 and 10. Back
46. See also Q 62. Back
Report, Session 1997-98, HC 712-I, para 26. Back
66; see also evidence, p 31, para 4.2. Back