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Mr. Sayeed: The right hon. Gentleman made a certain statement and I want to respond to it. I am glad that—after five years—the Government have decided that if they impose extra burdens on local authorities, they will fund those burdens. That is good news and we look forward to that funding in future.
As regards the suggestion that the previous Conservative Government were uninterested in home energy conservation, I remind the right hon. Gentleman that it was a Conservative Government who brought in the rules and the ability to fund—from public moneys—home energy conservation.
Mr. Meacher: I was not suggesting in any way that the previous Conservative Government were unconcerned about energy efficiency, although the range of measures that we have produced in five years has certainly accelerated the process substantially. I do not want to make much more of this point, but I was responding to the extraordinary statement that the Tory party is committed to the elimination of fuel poverty. I do not think that the record remotely suggests that—indeed, it suggests the opposite; but let us band together, in all the parties, in support of a good Bill. I commend the motion to the House and look forward to debating the measure in Committee.
BROAD ECONOMIC POLICY GUIDELINES
- That this House takes note of European Union Documents 8261/01 and 9326/01 on the Broad Economic Policy Guidelines; and supports the Government's welcome for the publication of the Guidelines in giving operational content to the conclusions of the Lisbon and Stockholm summits, in reflecting the importance of structural reform in tackling successfully the challenges of globalisation and competitiveness; and in promoting employment and social inclusion.—[Jim Fitzpatrick.]
SITTINGS IN WESTMINSTER HALL
- That, following the Order of 20th November 2000, Mr. Nicholas Winterton, Mr. John McWilliam, Mr. Frank Cook and Mr. Edward O'Hara be appointed to act as additional Deputy Speakers at sittings in Westminster Hall during this Session.—[Mr. Fitzpatrick.]
ADMINISTRATION COMMITTEE
- That David Wright be discharged from the Administration Committee and Mr. John MacDougall be added to the Committee.—[Keith Hill, on behalf of the Committee of Selection.]
Orphan Funds
Motion made, and Question proposed, That this House do now adjourn.—[Jim Fitzpatrick.]
10.28 pm
Mr. Barry Gardiner (Brent, North): It may amuse the House to discover that shortly after the title for the debate was posted my office received a telephone call from an earnest young man in the Department of Health. He asked which orphans I was referring to and which of their Ministers would be the most appropriate person to respond. I trust that by the end of the next half hour, my hon. Friend the Economic Secretary to the Treasury will not be wishing that the debate had indeed been assigned to one of her colleagues in the Department of Health.
The orphan assets to which I am referring are those held by life assurance companies. They are sometimes known as inherited estates and the Financial Services Authority has helpfully provided a working definition in its recent issues paper, No. 1—part of the with-profits review. The definition is as follows:
- "It is defined as the excess of assets maintained within the long-term fund over and above the amount required to meet liabilities."
Those funds result from the build-up of successive reserves from years of over-cautious returns to with- profits policyholders. Life companies use them as an important tool to support their businesses. They provide companies with investment flexibility by enabling them to invest more in higher risk assets, thus achieving better investment returns than rivals which have to maintain greater liquidity. They act as an insulator against adverse market conditions. They are used as working capital to develop business lines and to expand into new services. Sometimes, they are used to underwrite market share by supporting commissions on new business. Above all, they are used for what is called market smoothing of the fund.
Those are not only legitimate uses of those funds; they are precisely what those funds should be used for, and it is only when an actuary advises that all those functions can be adequately met by a smaller sum than the fund contains that the question of distributing a part of the inherited estimate can arise.
In a ministerial statement on orphan assets issued on 24 February 1995, the then Minister with responsibility for corporate affairs stated:
- "A life office may make distributions from surplus in the long-term fund as shown by the statutory annual actuarial valuation. It is common practice to make distributions to policyholders and shareholders in the proportion 90:10. In assessing policyholders' reasonable expectations, the Department would expect this ratio to be used as the basis of attribution between policyholders and shareholders."—[Official Report, 24 February 1995; Vol. 255, c. 361W.]
Given that the AXA inherited estate was valued at £1.7 billion, its shareholder value was enhanced by £595 million at the policyholders' expense. Some say that the sum is larger, but I will stick with the figure calculated by an independent actuary for the Consumers Association, which challenged the deal on behalf of the policyholders. I pay tribute to the work that it did in pursuing the case at the time. It rightly saw that the case would inevitably establish a precedent in the industry and encourage other life companies to do the same.
My hon. Friend the Economic Secretary will be pleased to hear that I do not propose to rehearse tonight all the details of AXA's deal with the policyholders, if indeed one can call it a deal—rip-off might be more accurate. However, I want to challenge her to act in concert with the Financial Services Authority, so that similar deals cannot be struck in future. As she will know, it is rumoured that the Prudential is considering what the market euphemistically calls a re-attribution and distribution of its orphan assets—a deal whereby the policyholders would be swindled out of their own inheritance by lawyers who tell them that, in exchange for giving up their contingent rights to the fund, they will get jam today.
My hon. Friend will recall, in the Old Testament, the selling of Esau's "contingent interest" in their father's estate to his brother Jacob for what was described as a "mess of pottage"—or a bowl of soup. For policyholders in Prudential, the orphan assets are evaluated at between £5 billion and £7 billion. That is an awful lot of pottage, but I suspect that it would provide very little comfort to the thousands of policyholders who are currently receiving advice from the Prudential that their policy is not on target.
Let me read to the House the lines that have become the most dreaded communication to home owners around the country:
- "We consider it is possible that your Plan may not pay out enough. To repay the target amount for this Plan when it matures needs future investment growth to be towards the top end of the current projection rates set by the independent regulator. In view of this you may wish to think about taking action."
Does my hon. Friend not share my disgust that people who have planned their savings and retirement on the basis that with-profits policies would provide them with a stable return are now seeing companies, such as the Prudential, sharpening their carving knives to cut them out of their fair share of the orphan assets that are supposed to underwrite their security?
With-profits funds are marketed to consumers as a lower risk way to invest. They are supposed to protect policyholders from the vagaries of the stock market by
drawing on the reserves built up over years. They may not climb the heights of direct market investment vehicles, such as unit trusts, but they do not plunge the depths either. That is the theory.In practice, there is a weak regulatory framework for with-profits funds. Directors have their obligations to maximise shareholder returns but have no corresponding duty to policyholders. The operation of the funds is not transparent. There is no obligation to disclose the amount of charges or the allocations made to policyholders or why these may differ from investment returns such as when money has been transferred into the reserves. There is no clear link between the investment performance and the annual bonuses.
Such a lack of transparency has been heavily criticised by the Consumers Association, which complains that such complexity can act as a barrier to competition. It says:
- "It makes it virtually impossible for consumers to work out whether or not they are getting a good deal and if it's worth switching to another provider. Moreover, even if it is possible to work out the merits of switching, it's often futile. The charging structures of many of these products is such that in many cases it's not worth switching to a new product as there won't be enough time to claw back the losses. This feature of product design means there is little scope for consumers to put competitive pressure on insurance companies."
The FSA's paper "Process for dealing with attribution of inherited estates" is an interesting discussion document that I welcome, but it fails to address the central issue of valuation and simply sets out various suggestions about the process itself. The FSA has been particularly reluctant to disclose the names of those companies that have been in discussion with it about orphan assets re-attribution or distribution. As ever, it hides behind the cloak of commercial confidentiality. It is a card that my hon. Friend may consider it has overplayed.
I suggest that my hon. Friend submits section 348 of the Financial Services and Markets Act 2000, which prohibits release of commercially sensitive information, to the Lord Chancellor's advisory group on the implementation of the Freedom of Information Act 2000 for review. Section 348 should be amended to restrict the prohibitions on disclosure and to allow the release of information that is in the public interest. Most information relating to attributions or re-attributions of orphan assets would, I believe, be in the public interest when one considers the need to protect the consumer in respect of funds that represent such a vast sum as £30 billion.
Transparency on that matter will certainly restrict the scope for creditors to act on behalf of shareholders to maximise their interests against the interests of policyholders. To that extent, I do not doubt that transparency would be extremely commercially sensitive. In fact, I hope that it may be considered prejudicial to commercial interests, just as withholding that same information is prejudicial to policyholders' interests. In my view, the Government and the regulator must act to protect the weaker party.
I urge my hon. Friend to ask the FSA to publish the names of companies that recently have been, or are currently, in discussion with the FSA regarding attribution, re-attribution, distribution or valuation of their
inherited estate. I urge her to ask the FSA to publish both the shareholder value, disclosed to policyholders during any attribution or re-attribution, and the value subsequently presented on the balance sheet to shareholders, with an account of any discrepancy between the two. I urge her to ask the FSA to make it clear to the industry that any deals relating to orphan assets should not proceed until the review of the process and issues about ownership and valuation are conclusively established in regulation.I also urge my hon. Friend to ask the FSA to reinforce the 90:10 rule, so that any proxy negotiator, such as those proposed by the FSA in its issues paper, should only be able to negotiate upwards from a base of 90 per cent. of policyholder value. The orphan assets should be ring-fenced so that at any given valuation point the economic value of the estate to the respective parties can be identified. That would ensure that deals represent a clear choice for policyholders between accepting a one-off payment or retaining valuable rights with a worth that is clearly quantified for their future benefit.
In particular, I urge my hon. Friend to ban deals, such as the AXA case, in which ownership is not clearly identified. Shareholders are not philanthropists and deals for contingent rights in the inherited estate are presented as if there may never be a time when the value of the fund is crystallised in a distribution. They are simply scams. Shareholders would not pay supposedly good-will gestures up front without the certain knowledge that the re-attribution of the estate following the deal is going to increase substantially shareholder value or shareholder dividend, and usually both.
Finally, I urge my hon. Friend to examine carefully, in respect of corporate accountability matters, the use to which companies have been free to put the orphan assets. Pension mis-selling was an industry scandal that went to the heart of corporate accountability. In a mutual company, the policyholders share in the risks and profits of running the business, and they must therefore bear the costs of any corporate wrongdoing. However, the whole purpose of a public company is that shareholders, not the policyholders, bear the corporate risks.
It is outrageous that many companies have sought to pay their pension mis-selling compensation out of the orphan assets. It is even more outrageous that companies such as Prudential, which was recently fined £650,000 for its delay in paying such compensation, should proceed to raid the orphan assets to pay its fines as well. That must be stopped.
The FSA has been extremely lax on the matter and has allowed the industry to use the inherited estates as some sort of shareholder slush fund to the detriment of the policyholders. In any future re-attributions, I trust that the FSA will make sure that all such borrowings from the orphan assets to pay out compensation and fines will be credited back to policyholders.
I welcome the fact that the FSA has started to examine the matter of with-profits funds. It has examined the process, and I welcome that. I trust that my hon. Friend will agree that the process alone is not enough. Policyholders must see effective regulation that protects their interests, so that the orphan assets are properly used to smooth the market downturn currently causing misery to policyholders such as Mrs. Yuill. Those assets must not
become the target of shareholders' greed, to be carved up behind the back of the very policyholders whom the FSA is supposed to protect.
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