Select Committee on Treasury Ninth Report

Life assurance


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.[121] However, a court hearing is required. Standard Life suggested that there should be a turnout requirement for a members' resolution advocating demutualisation.[122]

65. Although Mr Frazer drew our attention to eight occasions when mutual life assurance offices had demutualised recently,[123] 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".[124]

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,[125] and that on average mutual life companies had paid 5 per cent more in maturity values and fewer of their policies lapsed before maturity.[126]

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' return".[127]

68. The Treasury said that "the decision whether to retain mutual status is for the members. The regulator's main concerns are

  • that the proposed change of status should not put into doubt the insurance business' ability to meet its liability to policyholders;

  • 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.[128]

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.[129] 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".[130] 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.[131]

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.


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[132] 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' reasonable expectations".

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.[133] Mr Young identified a view that there would be a need for "considerable economies of scale before any company can live in that marketplace".[134]

121  See evidence, p 31, para 3.3 and p 33, para 15. Back

122  Evidence, p 31, para 3.4. Back

123  P. Frazer, Op. cit., p 27 (but two of these Mr Frazer categorised as "rescues"). Back

124  Q 41. Back

125  Q 44-45. Back

126  Q 50. Back

127  Q 52. Back

128  Evidence, p 100, paras 8 and 10. Back

129  Q 260. Back

130  Q 64. Back

131  Q 46. See also Q 62. Back

132  Seventh Report, Session 1997-98, HC 712-I, para 26. Back

133  Q 66; see also evidence, p 31, para 4.2. Back

134  Q 46. Back

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