Select Committee on Treasury First Special Report

Extract from memorandum from HM Treasury


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:


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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Prepared 22 March 2001