This is Money Blog

Standard Life: with-profits misery

February 23 2007

Standard Life, once top of the pile of with-profits providers, has sunk disastrously over the years. The price of past mismanagement is now horribly plain.

Here's a sample of 2007 payouts from Standard's big rivals - and Liverpool Victoria, whose returns are best of all:

Provider                      Payout

Liverpool Victoria          £63,905

Prudential                    £49,492

Norwich Union              £47,904

Standard Life               £38,054

Endowment payouts based on contributions of £50 per month over 25 years, maturing 2007. Figures provided by Liverpool Victoria, February 22 2007.

How can such a gap have opened up - particularly when, within recent memory, Standard Life was viewed as one of the best with-profits companies?

The answer lies in the devastating consequence of Standard Life's massive exposure to the stock market during 2000-2003, when share values plunged.

Sure, during that period other companies, including Liverpool Victoria, also had exposure to equities and so lost money, too.

But those other companies stuck with the stock market and so have bounced back magnificently since.

Standard's bosses, on the other hand, led by the insurer's disgraced former chief executive Iain Lumsden, left, were gambling on the markets with money they could ill afford to lose. When share prices really hit rock bottom, Standard was forced to sell its shareholdings - the bosses had effectively bust the bank - and it hasn't participated in the recovery since. It's a terrible tale of bungled and reckless management, for which policyholders are patently paying - years later.

I suppose the slender consolation - for which Lumsden and the other architects of the mess can claim no credit - is the fact that Standard's shares have performed nicely since the company was floated last summer. That, at least for the policyholders who kept their shares when the company demutualised, is some good news....

- Richard Dyson

Norwich Union windfalls: all your questions answered

(30 July 2008 - Update) - Norwich Union confirms £1,000 windfalls (and we answer all your questions)

Over 50 people have replied to my two blogs on the subject of potential windfalls being paid to with-profits policyholders of Norwich Union and (possibly) Prudential.

It's no wonder: there is big money at stake. Policyholders could net thousands of pounds each.

I've tried to address your questions in a general way in the blog below here, and the one before that here. And my colleagues have written more on the subject, too, like this piece by Simon Lambert here.

But many of you have asked additional questions and raised other interesting points. So I've asked Thisismoney to set up a special message board, which is now running here.

Anyone can browse the message boards, reading other users' discussions, without needing to register. But if you want to participate you need to register, which is free and quick.

It's well worth it, because you can discuss the issues more easily there than here on the blog. You can reply to one another and have a proper conversation as all posts are published instantly.

To start the conversation off, I've copied a number of the questions made in reply to my blogs into the message board and I've tried to answer several of them individually.

I promise to keep an eye on the boards in future too, and try to find answers to other questions as they crop up. But hopefully the message board will allow other people - better informed than I am - to chip in and provide their own answers and replies.

So if you've got any questions, thoughts, or anything at all to say on the matter of with-profits windfalls whatever, get to the message board and contribute right away here.

(All I'd ask is that if you want to contribute and you are employed by either Norwich Union or the office of Clare Spottiswoode, the Policyholder Advocate, that you're upfront about it!)

Best wishes and thanks for the interest you have shown so far,

Richard Dyson

With-profits windfalls - the 90/10 question

Prospects of windfalls worth thousands of pounds being paid to Norwich Union and Prudential savers have raised hosts of questions about the fairness or otherwise of these payments.

Based on some comments and questions from readers, I'm suspecting that in what I've written in my blog below and elsewhere on this site, I have failed to make absolutely clear what's at stake.

Norwich has a pot of £4 billion 'spare' assets. The Pru has a pot of nearer £10 billion. According to the rules, returns from these assets must go 90 per cent to policyholders (that's the endowment, bond, or pension policyholders) and ten per cent to shareholders (that's mainly big city institutions).

But Aviva (that's Norwich Union's parent company) wants to set things up differently in future. It wants to control this money completely, and 'buy' - for the best possible price - policyholders' rights to their future returns. Richard Harvey, the boss of the company, pictured, wants to strike the best deal he can for shareholders. He wants to pay the smallest windfalls he can possibly get away with to policyholders, and he wants to exert maximum control of the funds for shareholders. That's just his job.

Policyholders are pitted against shareholders in fighting over this £4 billion, and I'm sure I don't need to spell out which group holds all the cards.

Hence the role of the policyholder advocate.

In the past, when there wasn't a policyholder advocate (such as in the AXA case), the company could pretty much offer policyholders anything in lieu of their rights to the money. Most policyholders, understandably, were prepared to accept less than a fair deal either because they didn't fully grasp what was at stake (who could?) or, more probably, because they thought that a bird in the hand....

But the question on policyholders' lips now, surely, is:

If the rules say that policyholders should get 90 per cent and shareholders only ten per cent, what's the debate all about? Why doesn't Norwich Union just pay it out in that proportion? 

There's an easy answer to that question: the shareholders and Aviva's board are greedy so-and-sos. They control the money, in the sense that they decide whether it gets paid out at all. And, with that fact as their ultimate bargaining chip, they can demand more than their ten per cent share.

Mick McAteer, a finance specialist who used to work for Which? fighting consumers' corner, made a good point to me last week. He said: 'Most of Norwich Union endowment policyholders face a shortfall on their mortgage. In the light of that, you have to ask what on earth the company's shareholders are doing trying to argue for a bigger slice of the money for themselves.'

Well, yes, quite.

Policyholders might also want to question quite how much power is really wielded by the policyholder advocate, Clare Spottiswoode, on their behalf. In waging war with Richard Harvey and his shareholder chums, Spottiswoode starts from the unequal position of not ultimately controlling the money. Even if she says that any proposed deal looks rotten, she can't stop the company from going ahead and offering it to policyholders.

Policyholders have no choice but to place a lot of trust in her.

A few notes on who will get Norwich Union windfalls, and who won't:

A lot of people are asking whether or not their policy qualifies for a windfall. Basically, if you received a letter telling you about the deal, then you're probably in line for one.

If you received windfall shares when Norwich Union demutualised, then you probably won't get another windfall now.

What if your policy matures? To be eligible, your policy had to be in force on November 21 2006. If your endowment or pension naturally reaches its maturity after that date, you will still be eligible for windfalls, if and whenever they are paid. If on the other hand you encash your policy early, you will make yourself ineligible. With-profit bond policyholders will not get windfalls if they encash their investment before windfalls are paid.

Hope that helps. Thanks for your comments - do keep them coming.

- Richard Dyson

Norwich Union windfalls - the battle begins

Update: Norwich Union confirms £1,000 windfalls (30 July 2008)

Plus: Norwich Union windfalls Q&A: Is this a good deal? (30 July 2008)

January 14, 2007

The battle lines around those policyholders who will, and those who won't get windfalls, if and when Norwich Union successfully distributes its £4 billion 'inherited estate' - are being drawn.

And, if last week's first public policyholders' meeting on the issue is anything to go by, it's going to get bloody.

Windfalls for some Norwich Union with-profits policyholders are in the offing because the insurer's parent company, Aviva, wants to re-distribute a vast pot of £4 billion 'inherited assets'. For more on the background to this, read here.

It's serious money. It could mean big windfalls (that's thousands of pounds) for many of the estimated 1.2 million eligible policyholders.

But it's not yet clear who will get what. Should policyholders who have put the most into their endowments or bonds or pensions, over the longest period of time, collect the biggest windfall as a reward? Or should it be the newer customers, whose future is tied up with Norwich Union for longer, who get the most, because they have the most to lose over time?

The woman who will play a major part in deciding is policyholder Advocate Clare Spottiswoode, pictured. Last Wednesday she fielded strings of questions from worried and sceptical policyholders in the first of the five national roadshows that she will conduct this month and next. (For details of how to attend, visit Policyholderadvocate.org)

But you can bet that what was on the top of most policyholders' minds was the money. How much they'd get, and when they'd get it.

For now Spottiswoode's job is relatively easy. She can claim, quite reasonably, that she is listening to all policyholders' points of view. But soon her role will get nastier. She will have to tell some groups of policyholders why she has decided that they ought to get less of a windfall than others.

Policyholders last week asked some difficult questions - to which, in some cases, Spottiswoode didn't have answers. Here are two of the most commonly asked:

"If this £4 billion pot of spare assets has been sitting around for so long, why haven't policyholders been given more, and better, bonuses?"

Spottiswoode didn't absolutely know the answer to this. But the gist of what she said - along with help from an actuary who works with her - was that this £4 billion originated largely from policyholders, now dead, who had not been paid out enough money when their policies matured back in the 1960s and 1970s.

The money hasn't been touched since then because Norwich Union's parent company Aviva needs policyholders' permission to use it. That's what this process is all about. But Spottiswoode later told me that she needs to, and will, establish for sure that the money has not been used at all to date to benefit policyholders.

"How do we know that the money is only worth £4 billion. Mightn't it be even more?"

Good question from someone who evidently knows that insurers are as trustworthy as a rope bridge in an Indiana Jones movie. Spottiswoode said: " Don't worry, I'll check. I'm getting the raw data in March, which is when the numbers haved to be filed to the regulator, and with the help of accountants KPMG I will work out whether £4 billion is correct."

Other policyholders asked less crucial questions, for instance about why the Policyholder Advocate's office employed call centre staff based in India. (The answer to that one, predictably, is that it's cheaper.)

No-one asked who was paying Spottiswoode's wages and other costs or how much it would come to. But since there has been some comment on this in the papers, one of Spottiswoode's colleagues explained that if divided among all the eligible policyholders, the bill for Spottiswoode would come to 23p each. If the deal goes through, policyholders will foot the cost.

Keep your comments and questions coming, using the tools below (your email addresses aren't published, and you can post under any name). The Norwich Union windfalls - which if they come at all will not be paid till much later this year - are going to be good news for a lot of people. But much could go awry between now and then.

Me, my colleagues on Financial Mail and those on Thisismoney will, between us, give you the best coverage you'll find anywhere in print or on the web. So do stay tuned.

- Richard Dyson

Multiple sclerosis PC's case is lesson to insurers

For ten years, police officer Gary Dimmock's doctors thought he had multiple sclerosis. They wrote as much in his notes. But they never told him.

Now, after a legal battle, his East Sussex NHS trust has admitted this was not right. He's been paid over £10,000 in compensation.

This story is powerful ammunition for changes to the way health and life insurance is sold.

As my colleagues and I have reported for years, insurers expect people to complete insurance applications honestly and completely. But the insurers don't usually bother to look at doctor's notes at the time of application. (Too expensive, they say.)

The insurers only bother to call in the doctors' notes when a claim is made. At that point they spare no expense in trying to find a discrepancy between what the policyholder said at application, and what appears in doctors' notes. A discrepancy will often mean that the claim can be thrown out.

What would have happened in the case of PC Dimmock, right? He would have told his insurers one thing - and his medical notes would have contained something different , and far more sinister.

His story may be extreme, but our experience of investigating cases on behalf of readers shows that the phenomena of patients not knowing what is written on their doctors' notes is far from uncommon.

And it often results in claims being thrown out. Read about these cases, for instance, here. I've described the problem in greater detail here.

Recently, though, the Commission for Law Reform has suggested that UK law be changed by the introduction of something known as 'non-contestability'. Such a clause in an insurance contract would limit the insurer's ability to scrutinize previous medical records once a fixed period of time had elapsed since the cover was arranged (read more here). It's a good idea - and overdue.

As PC Dimmock's case makes horribly clear, patients often don't know what their medical notes contain.

- Richard Dyson

Painting the Post Office out of history

Post offices are being closed down everywhere and the closures trigger tidal waves of criticism (see Financial Mail's and Thisismoney's campaigning coverage, here).

Post Office bosses must hate the bad PR caused by thousands of empty former post office shopfronts everywhere, advertising their betrayal of the neighbourhood.

Answer? Reach for the paint pot.

Take this former post office branch near The Oval cricket ground, south west London.

It shut last year to a barrage of local protest, including objections from MP Kate Hoey, in whose Vauxhall constituency it falls.

The shop is still untenanted. But as if to ensure that passersby can't connect the dismal, grilled facade with the treachery of the Post Office, someone has carefully painted out the word 'POST' with (slightly mismatched) green paint.....

- Richard Dyson

Could you afford to buy the house you live in?

Roaring property inflation, set against far lower wage increases, mean that a record number of homeowners would not be able to afford to buy the property they live in, at today's prices.

At least, that is my guess.

The truth is no-one knows for sure what proportion of homeowners could buy their own homes today.

I phoned Martin Ellis, right, the property and economic guru who works for Halifax, and asked him to guess how many of Halifax's borrowers could afford today to buy the homes they owned.

'It's a great question and I don't know the answer,' he said.

No measure exists of the phenomenon.

The nearest data that could reveal the answer is the houseprice/earnings ratio. And at 5.5 (ie the average house costs 5.5 times the average wage) this ratio is at its highest ever, Martin Ellis says.

The question is important because it gives a clue as to future volumes of transactions. There will always be a group of homeowners - such as pensioners - who would be unlikely to have the income to afford to buy the homes they own. But if younger families can't afford to move up the ladder, transaction volumes - and ultimately prices, too - should flatten or fall.

Maybe this is happening in some parts of the country already. It does not appear to be happening in London and the South East. Vast price rises over the past year here mean many recent buyers couldn't afford their homes today - mere months after they moved in. Their wages will have to rise dramatically just to get them back to the position they were in when they bought.

I certainly could not afford to buy the home today that I bought in August 2005. And when I look at my neightbours, most of whom seem successful and prosperous enough, I reckon the same is true of them.

Could you afford to buy your home today?

- Richard Dyson

Lender offers over 7.5 times income to mortgage borrowers

Want the biggest mortgage ever? This may be where to find it.

Pretend you are a mortgage broker and plug your details into this calculator here.

Depending on your income, and the interest rate available (you need to click the 'i' button for the rate card) you can be offered anything up to 7.53 times income.

Fantastic? Ludicrous? Criminal? You decide.

The calculator is hosted by First National, part of GE Money. GE Money's website has plenty of worthy guff about responsible lending, etc, and no doubt it could argue that lending someone seven times their income on a variable rate mortgage is a perfectly sensible business.

How the sums work out

Take a couple with no other debts earning £25,000 each. After tax and National Insurance that's a monthly income of £1,570 - or £3,140 between them. Assume they have no debts and a big deposit.

Enter their details and.... "From our calculations we may be able to lend up to...  £304,589 on a capital repayment basis.... and £376,506 on an interest-only basis."

What’s the mortgage going to cost?

By my reckoning, a £376,506 interest-only mortgage charged at 6.64 per cent (that's GE's cheapest rate for borrowers with the best credit profile and the biggest deposit) is £2,083 per month.

And a £304,589 repayment mortgage at 6.64 per cent works out at £2,108 per month..

That would mean that in either case, over two thirds of the couple's after-tax income was being gobbled up by mortgage bills - linked to a variable mortgage rate, mind.

What if the rate goes up? Let's say it goes up by a quarter point to 6.89 per cent. The couple's monthly payments would then rise to £2,156 for the repayment or £2,161 for the interest-only option. That makes their mortgage almost 70 per cent of their monthly post-tax income.

If rates rise by half a percentage point, pushing monthly payments over £2,200, then this couple would be spending over 70 per cent of their after-tax income on their mortgage.

I think they might be in trouble by then.

Fascinatingly, GE's blurb contains the following: "An interest-only mortgage must be backed by an adequate investment vehicle (e.g. Endowment, Isa Pep)." Ah. So that means that out of the 30 per cent of their income that remains after paying the mortgage interest bill, this couple needs to find money sufficient to invest in a vehicle that will produce a lump sum to pay off their £376,506 mortgage capital debt.

Good, prudent advice from GE Money.

Question is, what would that leave them to eat?

- Richard Dyson, Financial Mail

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Housing market: prices soar, sales plunge

Latest house price data from online agency Rightmove for October shows asking prices continuing to soar.

Nationally, prices are up two per cent in the past month - or 11.5 per cent over the past year.

The number tallies with the FT's house price index, published on the weekend, showing annual growth of just under ten per cent. And it comes days after the Royal Institute of Chartered Surveyors warned that demand in London was so fierce that the phenomenon known as gazumping - where desperate buyers outbid rivals' offers - is back in evidence.

London is still warping the national trend upward (see below).

But rising prices everywhere are linked to falling transaction volumes, particularly in the capital.

Fewer people are selling and moving, and the shortage of supply is a major factor in driving up prices. Both operate together as a vicious cycle because as prices rise - taking stamp duty costs up alongside - more homeowners stay put, further limiting supply, and intensifying competition for available properties.

Rightmove's data itself shows that the number of properties being marketed per agent has fallen sharply. In September 2005, the average was 71 properties per agent, compared to September 2006's figure of 63.

Numbers from the Office of the Deputy Prime Minister on house sale volumes tell the same story - on a bigger scale.

The number of transactions in England and Wales has hovered around 1.4 million for many years. Since 2000, the peak was reached in 2004 with 1.793 million transactions. This dropped 15 per cent to 2005's figure of 1.531 million.

The drop in London transactions is steeper: down 17 per cent from 158,000 to 131,000 transactions between 2004 and 2005.

So where does the cycle end? With a seized-up, sticky market in which prices are very high but where very little shifts? With a correction?

Agents say that a large of number of buyers are investors, and that should be reassuring: after all, professional investors must be achieving a reasonable yield even at these prices.

But overal the picture provides ammunition for the doomsayers' arguments: they say that price rises based largely on a historically limited supply must be fragile.....

- Richard Dyson, Financial Mail

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>> www.thisismoney.co.uk/houseprices

London's house prices soar for now - not so elsewhere

House prices nationally jumped almost half a per cent in September, says property analyst Hometrack in its latest data - the fastest rate of growth for two years.

But lift the lid on the data and the warping effect of London is easy to spot.

For a start, no region other than London achieved monthly growth of more than 0.3 per cent for September. It was London's massive 0.9 per cent growth that pulled up the average.

So what's happening in the capital? Online estate agent Rightmove, which publishes its own house price index, sheds a little light. Rightmove's latest numbers show that asking prices in prime London - that's Kensington and Chelsea, Westminster and Camden (to net in the Regents Park area) - are all up by over 30 per cent in 12 months.

Central, secondary boroughs - Islington, Hackney, Lambeth - are up around 20 per cent.

These are vast numbers, so I called Rightmove to ask for the volumes of property instructions backing its data. Here's the result for August 2006: Kensington and Chelsea, 490; Westminster, 677; Camden 1,154; Islington 609; Hackney, 569 and Lambeth, 1,198.

The volumes are big enough to be credible. But these are asking prices, only, mind - not sales prices achieved.

The Rightmove numbers suggest a market in which very greedy vendors exploit a situation in which there is little supply and quite strong demand.

Back to the latest Hometrack data, and this is clearly born out. Hometrack says that over the last six months supply in London is down by about three per cent, compared to demand, which is up by more than ten per cent.

Only in London and the South East is the relationship this way round. Every other region in the country is experiencing a situation where the rate of supply is growing faster than the rate of demand.

So how long will London remain the odd man out? Are there signs of the end of the trend? Probably.

You would expect the gap between asking and sales prices to widen toward the end of a cycle, as vendors' expectations drift out of line with emergent buyer caution. By that argument Rightmove's vast increases in asking prices might be masking a market which is already cooling.

It's also worth looking at initial asking prices relative to sales prices achieved. Hometrack says that for London, this ratio of asking-to-sales price has fallen for three months in a row.

That would be a sign, if not a certainty, that London's inflation is coming off the boil.

- Richard Dyson, Financial Mail on Sunday

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