July 31, 2008 | posted by Pam Atherton in Insurance, Investments |

A million Aviva policyholders in two of Norwich Union’s with-profit funds are to be made offers of windfall payouts of, on average, £1,000.
 
About 700,000 people could receive between £400 and £1,000, and another 220,000 could get a payout of between £1,000 and £3,500 if they accept. The payouts, worth a total of £1bn, follow lengthy negotiations between policyholder advocate Clare Spottiswoode and the management of Aviva (formerly known as Norwich Union).

The offer only applies to investors in two of Norwich Union’s oldest funds - CGNU Life and CULAC with-profits funds, who hold endowment policies, pension policies and with-profits bonds.
 
The payout will come from shareholders’ funds.  The company is effectively buying out policyholders’ rights to any future claim on the surplus of the two with-profits funds - known as the ‘inherited estate,’ or orphan assets.
 

The inherited estate has  largely built up over many decades because with profit funds reserve more money than they need to enable the fund to smooth returns, but also due to some policyholders failing to claim when their policies mature.
 
The amount offered to individual policyholders will be outlined later in 2008, and if accepted will probably be handed over next summer.
 
Policyholder advocate, Claire Spottiswoode, an independent expert appointed to represent policyholder interests, said: “This deal is good in all respects. It also provides a fair return to shareholders.”

About 70 per cent of the inherited estate is being transferred to policyholders in total, either as bonuses or cash and almost all of the cash payments will be tax-free.
 
That said,  individual policyholders can choose to turn down the offer, and retain their right to future claims on the inherited estate.  But Aviva warned that it does not intend to make any further payouts in the next few years.

The Financial Services Authority (FSA) said that its preliminary assessment was that Aviva’s offer was fair.

In June, the Treasury Select Committee criticised the FSA for failing to protect with profit policyholders, saying that not enough was being done to stop insurers from managing these funds in the interests of shareholders, rather than policyholders.

 But at least Aviva has agreed to make a payout, unlike Prudential which disappointed thousands of its policyholders last month when it changed its mind at the last minute on a proposed distribution of  its inherited estate.

Defaqto investment principal, Fraser Donaldson, commented: “One of the conclusions drawn from Prudential’s decision not to share its surplus with policyholders in the form of a windfall is that this may be of benefit to policyholders in the long term, and underlined Prudential’s commitment to this market for the foreseeable future.

“Norwich Union’s decision to pay out a windfall, could be viewed as the first step in backing away from the with profits market. Whether or not policyholders will be better off in the long term for accepting the windfall, only time will tell. At least the NU policyholders advocate and the FSA feel this a fair offer.”

“http://www.aviva.com/index.asp?PageID=55&Year=2008&NewsID=4249