Standard Life inherited estate falls 80 percent
Standard Life have announced the value of the inherited estate has fallen by 80 percent and may suffer further losses if stock markets continue their slide. The company also announced that surrender and transfer values on many of its with profits plans would be cut by up to 8 percent.
While the inherited estate fell from £1.5 billion to just £500 million last year, it had fallen to only £300 million by the end of February this year. The company conceded that if corporate bond spreads rise and equity prices decline a further 20 percent, it would fall to £100 million. Worse conditions would see further declines. However this massive fall isn’t simply the result of disastrous investment performance, the company points to hedging in equities limiting falls to £50 million, but rather the use of some complex accounting.
As a result of the annuity reinsurance deal with Canada Life, corporate bonds were released to be marked to market. This happened during one of the largest slumps seen in corporate bonds resulting in £700 million being immediately wiped off their value. The loss to the estate comes from the attribution of bonds to asset shares. The procedure appears to disadvantage the policyholder by transferring bond exposure to them however Standard Life say they have simply taken an indirect holding and put it into policyholders direct asset share. Group Finance Director, David Nish, explained that “it was no different to the asset exposure policyholders had on day one”. He pointed out that “policyholders now have a direct holding in the assets underlying the estate”.
Should the value of the estate fall further then its use in bonuses would obviously be affected. In a worse case scenario of the estate being wiped out completely, shareholders would be forced to support the with profits fund by foregoing any transfers from the fund for a period of up to 20 years. Despite this it appears that Standard Life, along with many others, now favours shareholders over policyholders. Standard Life’s view of how risk and reward are allocated between policyholders and shareholders is unambiguous though. David Nish said the “key thing when demutualisation happened was that shareholders took longevity risk and policyholders took the investment risk”.
It was also announced that surrender and transfer values on a number of with profits policies will be cut by between 5 percent and 8 percent. This does not apply to with profits plans where surrender and transfer values are calculated daily. It will affect 1.4 million with profits pension and endowment policyholders who now suffer an average MVR of 8.3 percent. The cuts are blamed on poor investment market performance early this year.
