By Anna Sofat
Independent financial adviser with AJS Wealth Management Ltd
Aviva's decision to pay a special bonus worth about £2.1bn to its 1.1 million Norwich Union with-profit policyholders is a stroke of genius in many ways but not as generous as it may sound.
Is the payout as generous as it first seems?
The company has been locked in discussion with its independent policyholder advocate, Claire Spottiswoode, about how best to "reattribute" the surplus within its CGNU and CULAC with-profit funds.
Over the years, the funds had accumulated a surplus approaching £5.2 billion and Aviva, parent of Norwich Union, had put forward two previous proposals to reattribute the surplus.
However, both have been rejected by Ms Spottiswoode, who was appointed by Aviva some two years to represent the interests of its policyholders.
Under a reattribution of the surplus capital, Aviva would be able to retain some of the surplus funds to use elsewhere in its business. However, Ms Spottiswoode has been arguing that policyholders have a right to expect that the inherited estate should be used for their benefits or distributed to them and she had felt that the current FSA rules supported her position.
In December, the FSA issued further clarification of its rules and this confirmed that the company could utilise the surplus in the inherited estate for a number of purposes including:
- Providing capital to subsidise the writing of new business
- Paying shareholder tax
- Making strategic investments
Aviva has taken advantage of the FSA clarification to move the reattribution agenda forward by adopting a two-prong approach.
On the one hand, it has decided to distribute a substantial part of the surplus - some £2.1 billion out of a total £5.2 billion via a special bonus. The payment of a special bonus requires no input by policyholders but no doubt will be seen by many as a generous payout.
Aviva has presented the announcement as a generous and welcome payout highlighting the fact that the policyholders are getting 90% of the payout and the company 10% - the normal split with any bonus payout.
At the same time, the company has put forward a revised proposal for the reattribution of the remaining estate to Ms Spottiswoode and is putting pressure on her to make a decision by the end of February.
What to expect
What can policyholders expect and why is this bonus payout not as generous an offer as it might first appear?
The amount policyholders will get is dependent on the value of their qualifying policy. First of all, only policyholders in the old Commercial Union (CULAC) and General Accident or the members of the merged (CGNU) will get a payout.
According to Aviva, a typical with-profit bond holder who had invested £30,000 in 2001 will get a total of £4,500 in total - £1,500 each year for the next three years whilst an endowment policy holder who had taken out an endowment in 1995 paying £50 per month will get £3,735 in total.
The bonus will be paid over three years and will only be payable to policyholders who have a qualifying policy as at 1 January, 2008 and retain it for the next three years.
Aviva announced a £2.1 billion payout to 1.1 million policyholders
Consequently there are a number of losers including:
Policyholders whose policies have matured since November 2006, when the company first announced its intention to reattribute, and policyholders whose polices mature this year or next year will only get part of the bonus.
Norwich Union has only been able to make the distribution by ensuring that it has made sufficient provision for future liability in the fund. The company has done this by switching assets from equities to gilts.
Whilst the company can underpin the fund by buying gilts which will mature in time to meet its future liability, the potential for future investment growth will be limited and policyholders could well lose out in future as the company forgoes growth in favour of safety.
So, it is not necessarily good news for future bonuses.
What about the rest?
Finally, we still do not know just how much of the estate the company intends to use for purposes which might be allowable under the recently clarified FSA rules but which will not necessarily benefit policyholders directly.
So what should policyholders do at this stage? There is not actually anything for them to do or decide. By taking the route of paying a special bonus, Aviva has effectively taken the route of least resistance and at the same time won some brownie points with its policyholders.
After all no one wants to make a decision about accepting an offer whilst there is a niggling question about just what they are giving up in return.
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