Norwich Union Customers In Line For 500 Windfall Print E-mail

Telegraph – 1 June 2009, London

More than 1m Norwich Union customers will receive voting packs this week offering them a windfall, estimated to average about £500.

All windfall payments will be calculated individually, with payments dependent on the size of the policy held and how long it has to run. But Norwich Union has confirmed that a minimum payment of £200 will be paid to each qualifying policyholder. Many will receive far larger sums than this.

To collect this money, policyholders have to sign away their rights to any future payments from the insurer's "inherited estate".

For those unfamiliar with the jargon, this is the surplus money that has built up with the insurer's with-profits funds. It is estimated that this estate is currently worth £1.4bn.

The following questions and answers provide further information for those in line for a payment.

Will all Norwich Union customers receive these windfall payments?

No. These payments will be made only to customers who have with-profits savings in either the CGNU Life fund or its Culac with-profits fund. These are the original General Accident and Commercial Union with-profits funds, both of which have either been merged or taken over by Norwich Union in the past decade. These savings plans will be with-profits pensions, endowments or savings bonds.

Will Norwich Union tell me exactly how much I will receive?

The information being sent out this week will give you an individual cash offer, but this is only the minimum you will receive if you vote in favour of the deal. If the value of Norwich Union's inherited estate increases over the summer – which it may, if share prices continue to rise – then this amount will be increased marginally.

The current minimum payment of £200 is based on the estate being valued at £1.2bn. But current estimates, thanks to a modest stock market recovery, place the value of the estate closer to £1.4bn. If this remained the final valuation, the minimum payment would rise to £244.

Final valuations will occur in August, when an average will be taken of the value of the estate over the previous three months.

The individual offers being sent out this week depend on both the size of your current savings plan and the length of time it has to run to maturity, both of which are unlikely to change significantly. Those whose policies have longer to run will receive larger offers because they are giving up more.

Why is that?

By accepting the offer you are waiving your rights to any future "special distributions" from this inherited estate. In February 2008 Norwich Union did make special payments to policyholders, totalling some £2.1bn. If your policy has 20 years to run, as opposed to five, then you clearly have a greater chance of receiving similar future payments.

Am I better off keeping these rights then?

It is hard to give individual advice, but the Policyholder Advocate, Clare Spottiswoode, who has been appointed to represent policyholders' interests, argues that in the vast majority of cases customers will be better off accepting the cash offer now.

She estimates that the maximum amount that Norwich Union would pay out in special distributions would be £100m. If all of its policyholders accept the current offer, the company will have to pay out some £500m. Therefore she argues that most will be better off taking the cash today rather than waiting for promises that may never be delivered.

Further guidance is given in the booklet published by the Policyholder Advocate, which is included within the information being sent out by Norwich Union this week.

Will I have to pay tax on this windfall?

No. All payments will be tax-free and in cash.

When can I expect this money?

Don't book the holiday yet. It is expected to be another six months before cheques are sent out in the post. Under the current timetable it is hoped that those who accept the offer will start to receive their payments from November, with a view to all payments being made by Christmas.

How many people have to vote "yes" for the deal to go through?

This is not a vote where the majority decision stands. Each person is given the option of either accepting the windfall or retaining their rights to the inherited estate. Even if 99pc of people opt for the windfall, and one policyholder votes not to, then that person will still retain the right to receive future payments from the estate.

When do I have to vote by?

To receive this windfall your voting form must be returned by August 21.

I thought with-profits policyholders were entitled to 90pc of any payout from a with-profits funds. Why isn't Norwich Union paying out 90pc of this £1.4bn estate as "windfall" payments?

Any payment made from a with-profits funds is supposed to be split on a 90/10 basis – with 90pc going directly to policyholders and just 10pc going to the shareholders. But this is not a distribution (or even a redistribution); this is a reattribution, and with this linguistic sleight of hand, such rules no longer apply.

Given that these funds have sat around for decades without being paid out, Norwich Union is probably on a pretty sound footing by arguing that it is unrealistic ever to expect that the total value of this estate would be distributed to policyholders; that, it argues, would fundamentally weaken the fund.

So what it is paying is an amount that it says represents "fair value" for what policyholders could reasonably expect to get from the fund in future. Most policyholders will be unable to judge whether this is fair or not, which is why Ms Spottiswoode was appointed to argue on their behalf.

If all policyholders agree then the full amount will be transferred from being largely owned by policyholders to being totally owned by shareholders.

I thought that Norwich Union was originally talking about windfalls of £1,000. What happened to them?

This figure was bandied about when this issue first arose, more than two years ago. But the discussions to hammer out a "fair" deal for policyholders have been protracted, and in the interim the credit crunch, banking crisis and recession have sent equity and property prices spiralling downwards.

As a result the inherited estate, which was at one point valued at £3.1bn, fell to a value of around £1.2bn – hence the insurer's decision to renegotiate these payments in February this year.

With hindsight you could argue that if Ms Spottiswoode had simply rushed through a deal, which might not have represented such good value for policyholders on paper, customers could have collected more in pounds and pence as they would have been receiving a smaller share of a larger pot - although the Policyholder Advocate's office argues that this would not have been the case.

Either way policyholders are advised to put aside such "what if" notions and focus their minds on the cash-in-hand offer that is now available.

I haven't received my voting pack yet. What should I do?

With more than 1m packs to send out, Norwich Union says it could take up to a month before all policyholders receive the correct documentation. If you have not received yours by the end of June then contact the insurer.

Why aren't bonuses being paid on Norwich Union's other with-profit funds?

The funds involved are strong funds that have built up substantial surplus assets, so are able to make these payments. There isn't the same surplus in the weaker Provident Mutual fund to pay out. Policyholders in the old Norwich Union fund did receive a similar payment when the insurer demutualised in 1997.

Are other insurers planning similar action?

To date, Axa is the only insurer to have undertaken similar action, although consumer groups said policyholders got a poor deal. Prudential was planning to reattribute its inherited estate, but its plans were shelved last year when the insurer dropped proposals to carve up its £8.7bn estate. At the time it said this was "to protect the long-term financial security of the with-profits fund".

Legal & General is also known to have a substantial inherited estate but has not announced plans for any distribution or reattribution scheme.
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