Extract from memorandum from HM Treasury
MONITORING OF TREASURY COMMITTEE RECOMMENDATIONS
The following section was relevant to the Committee's
Ninth Report, 1997-98: the Misselling of Personal Pensions
and was omitted from Appendix 1 to the Report as published:
ATTRIBUTION
OF
ASSETS
OF
LIFE
ASSURANCE
COMPANIES
Committee members will be aware of a recent proposal
that affects the attribution of the assets in the with profits
fund of a large insurance company. This is the proposal by AXA
to make an offer to the with profits policyholders of AXA Equity
and Law Life Assurance Society (AELLAS), a wholly owned subsidiary.
The Government's general policy on life assurance
companies and their assets was set out in the reply of 24 July
1998 given by the then Economic Secretary, Mrs Helen Liddell MP,
to Derek Twigg MP [Official report, Col 751]. The statement of
1998 confirmed the principle that the interests of policyholders
as a class and shareholders in any potential distribution of surpluses
from with profits life funds of proprietary insurance companies
should generally stand in the ratio 90:10. Any attribution of
the inherited estate for accounting purposes would therefore normally
be made on this basis.
This general principle is subject to interpretation
in the circumstances of a particular case, for example to take
account of any contractual commitments, company statements or
practice, or any other relevant factor. As each case must be considered
on its merits, the Government does not believe that a statutory
underpinning of the 90:10 principle would be appropriate.
Depending on the arrangements in a life business,
the costs of compensating customers for personal pension mis-selling
can be one kind of business cost which falls to be treated under
this general principle. Where it applies, this means that policyholders
and shareholders bear the cost in the ratio 90:10, i.e. in the
same proportion in which any profits of the fund would have been
attributed. But the Government expects shareholder-owned life
companies to contribute from shareholders' funds an amount at
least sufficient to ensure that the life business does not become
unable to fulfil the reasonable expectations of policyholders.
The 90:10 principle remains key in the AXA proposal,
where it is proposed that a portion of the inherited estate of
the with profits life funds should be earmarked for distribution
to policyholders and shareholders in those proportions. However,
the AXA proposal also introduces a new element. In addition to
the 90:10 distribution, AXA is offering to buy out for cash (to
be paid to the current generation of electing with-profit policyholders
from shareholder resources) the interests of with profits policyholders
in any future distributions from the inherited estate attributed
in respect of the new with profits life fund.
The Financial Services Authority (FSA) carries out
day to day supervision of insurance companies as contractor to
the Treasury. In the context of the AXA proposal, the Government's
view is that the FSA as regulator needs to be satisfied as to
the solvency of AXA's business should AXA's proposal proceed,
and that the with-profit business will remain able to fulfil the
reasonable expectations of policyholders and potential policyholders.
Having satisfied itself on those two points, and having reached
a positive view on whether a particular proposal falls within
the range of deals which might reasonably be put to policyholders,
the regulator should allow policyholders to express their views.
The FSA has raised no objection to the proposal being
put to policyholders. Policyholders have been asked to vote to
signify their acceptance or rejection by 16 October. Given the
acceptance by more than 35 per cent of policyholders, the proposals
will now be put before the Court. The Court may make an order
sanctioning the scheme but that is subject to the Court being
satisfied that certain procedures and requirements have been complied
with. These are described in the Insurance Companies Act 1982,
Schedule 2C, Part 1. They include a requirement that a report
by an independent actuary be prepared and submitted to the Court.
Policyholders and certain others are entitled to make representations
to the Court.
The Government considers that the approach taken
in this case supplements the principles outlined in its earlier
response to the Committee.
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