June 27, 2008 | posted by Pam Atherton in Insurance, Investments, Pensions, UK economy |

Prudential today announced that it is pulling the mooted distribution of its inherited estate, following years of mulling the issue and negotiations with the FSA.

The inherited estate derives from assets accrued over many decades in its with profit fund which are assets in excess of the amount the insurer needs to fund its obligations to with profit policyholders.

AXA distributed part of its inherited estate a few years ago and Aviva (Norwich Union) is currently finalising an agreement over the division of its orphan estate.

Prudential’s announcement will be a bitter disappointment for the 4.5m with profit policyholders who would have been eligible for a windfall payout.

Prudential chief executive, UK & Europe, Nick Prettejohn, said: “Our with profits fund has been the top performing life fund in the UK over the past one, three, five and 10 years. Our overriding priority is to maintain the long term financial security of the with profits fund and to continue delivering strong performance for the benefit of our policyholders.”

Prudential chief actuary, David Belsham said: “Having a large inherited estate has enabled our investment managers to take a long term view on our investments. In 2003, we were buying shares at the bottom of the market when other insurers were forced sellers due to capital and regulatory constraints.

“The fund has produced fantastic investment performance of 134 per cent over 10 years and we paid out £2.7bn to with profits policyholders in February this year - more than a third of the value of the entire with profit fund of £79.1bn.”

However, the company was lambasted in a recent Treasury Select Committee (TSC) hearing when the insurer disclosed that it had used £1.6bn of the orphan estate to pay compensation for the  mis-selling of personal pensions in the 1990s. 

But Mr Belsham hit back saying: “No policyholder since 1990 has contributed to the the £8.7bn inherited estate so none of these policyholders have lost out from the £1.6bn used for mis-selling claims.”

A TSC report has also attacked the FSA for failing “to develop clear principles for the regulation of inherited estates” and for allowing Aviva to phase the distribution of its orphan assets over several years.

Which?, the consumer group, said the findings were a “damning indictment of the FSA’s lax regulation of the with profits industry.”

For more on the decision visit www.prudential.co.uk