The Norwich Union Plan - A Guide to the Issues
This part of our site deals with the main issues in the Norwich Union reattribution plan. It also explains some important things policyholders need to know about with-profits funds.
The Plan
Norwich Union would like to reorganise some of its with-profits funds so that it can use more efficiently the assets (that is, shares, property, government securities and cash, among other things) which belong to these funds. These assets are currently part of the with-profits fund called the “inherited estate” and there are limits on what it can be used for (please see point 2 below).
The Norwich Union plan would be achieved by using a process known as a “reattribution” (please see item 3 below). Norwich Union needs the agreement of policyholders to do this. If a policyholder agrees to the reattribution plan, they will be asked to give up their right to any future 'distribution' or sharing out of the inherited estate. (‘Distribution’ is explained in item 2 below.)
In return the policyholder will receive a payment or, in some cases, an additional bonus allocated to their policy. The policyholder’s investments would then be put into a different fund. That fund will be properly supported (please see item 6); the Financial Services Authority has rules to ensure that policyholders’ funds are protected.
If a policyholder does not wish to accept the offer, their position will remain unchanged – their policy or policies will be put in a fund that has the appropriate resources to carry on as before.
Whether or not a policyholder accepts or rejects the offer, the terms of the policies themselves remain unaffected (please see item 5 below).
1. With-profits policies
With-profits policies are long-term investments provided by insurance companies. Policyholders pay premiums which are then put together in a pooled fund which is invested by the insurance company. If the investments perform well, a bonus is allocated to policies. Companies routinely hold back some investment returns in good years, so that bonuses can be topped up in years when the fund performs poorly. This is known as 'smoothing'.
2. What are an ‘inherited estate’ and a ‘distribution’?
Inherited Estate
The inherited estate is the expression used to describe surplus assets in a with-profits fund (in other words, assets not required to meet the liabilities of the fund). An estate will often build up over many years. Whilst an inherited estate, like other assets allocated to a with-profits fund, is owned by the company, it can only be used for a limited number of purposes as follows:
- to provide investment flexibility (for investment in equities, which offer higher expected returns than some other investments, but also a higher risk that they might not);
- to smooth bonuses to reduce the impact of sudden sharp changes in investment markets;
- to provide extra security against unexpected calls on reserves; and
- to support the sale of new business.
There are basically only two ways in which the shareholders of the company can access the estate for other purposes – both of which have different characteristics – that is, through a distribution or a reattribution of inherited estate.
Distribution
A distribution is a payout from the inherited estate to policyholders (90 per cent) and shareholders (10 per cent) and may come about in a variety of ways. FSA rules can require a distribution when, for example, the company has more assets than it needs to support its with-profits business or when no new with-profits business is being written from the with-profits fund. A distribution is made in the form of bonuses allocated to policies.
If a distribution happens the remaining assets of the inherited estate continue to support smoothing and investment flexibility.
3. Reattribution
A reattribution is the process whereby the company offers to buy out the rights or expectations of policyholders in relation to a possible future distribution of the inherited estate. Policyholders are given an incentive payment if they choose to give up their right to take part in any future distributions from the inherited estate. The position of policyholders who choose not to accept the offer remains unchanged.
Following the reattribution, the inherited estate remains available to support smoothing and investment flexibility, but the estate becomes owned 100 per cent by the shareholder.
4. Which policies are included in the Norwich Union plan?
The plan affects policies that are in the with-profits businesses of Commercial Union Life Assurance Company and CGNU Life. These are ‘eligible’ policies, that is, holders of them are expected to be those who would be offered an incentive payment
If you wish to check the potential eligibility of your policy a link can be found on our website in the section marked ’Eligibility ‘.
5. Are the policies themselves affected?
No. Whether or not you accept the eventual offer, your main policy terms will remain the same. If you accept the offer you will be giving up your interest in the inherited estates. If you do not accept an offer, you will keep your rights but not receive an incentive payment.
Whatever you decide:
- you will not have to pay different premiums
- any guarantees remain unchanged
- payments on policies will continue to be based on investment performance as they were before the reorganisation
- there will be no change to the length of time that the policy has to run
6. What happens now?
Clare has undertaken consultation with policyholders and continues to welcome your comments about the Norwich Union reattribution plan. Clare is involved in detailed negotiation about the amount of an incentive payment to be offered in return for policyholders giving up their interests in the inherited estates – this is expected to continue through summer 2007.
Following the negotiations, Clare will prepare a report on her work which will include her recommendations to you in relation to any offer from Norwich Union. A summary of the report will be sent to you. The full report will be available on the website.
It should be emphasised that this report will be Clare’s recommendations on the Norwich Union plan and its offer to policyholders. You may wish to consider with your independent financial adviser the recommendations and the way they might affect you.
At the same time as the publication of Clare’s report, Norwich Union will write to you with the details of the reattribution plan, asking eligible with-profits policyholders to agree to the reattribution and accept a payment (or additional bonus) in return for giving up any interest in possible future distributions of the inherited estate.
Policyholders will need to remember that if they wish to accept they will have to reply to Norwich Union when it writes with the offer.
If you vote ‘no’ or do not send back your voting form, you will not get a payment but you will keep all your rights to possible future 90 per cent distributions from the inherited estates.
Once this period (technically known as an ‘election’ period) is over, Norwich Union will go ahead with a formal legal process and ask the High Court to approve the reorganisation proposals. If this is successful it is expected that payments to policyholders who have accepted the reattribution plan would be made from mid-2008.