When with-profits funds perform well the companies that manage
the funds hold back a proportion of the profits to ensure that they
can still pay out bonuses when the fund underperforms (known as the
smoothing process.)
However, companies often hold so much back that they end up with
money in reserve that is surplus to what is needed to meet
policyholder commitments and other obligations - this surplus is
called the "inherited estate". The three biggest with-profits
providers, Norwich Union, Prudential and Legal & General, are
thought to have built up a massive £15bn between them in inherited
estates.
This may seem like a good thing - surely these massive surpluses
will benefit the with-profits funds policyholders? But lax
regulations mean that the companies use these funds to pay for
other things such as fines and shareholders' tax bills, for example
Prudential used £1.6bn to compensate customers who had been
mis-sold. In other words they are depriving policyholders of money
that they are perfectly entitled to.
The companies are being pushed to make things fairer for their
with-profits funds investors, but, unfortunately for now, there is
not a lot policyholders can do.
Claims Financial
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Mr R Evans 11 Nov 2010