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money for numpties: Not all profits policies are up to Standard; In his continuing series, ALAN STEEL says Standard Life's moves to cut costs are good news for investors, but he blames the Equitable Life debacle for the confidence crisis over with-profits policies.


THE recent job losses announced at Standard Life won't do much for the confidence of policy holders.

It's hard to believe it wasn't that many years ago when with-profits companies such as Standard Life were held up by experts as models of excellence.

One reason for this, we were told, was Standard Life is a mutual.

That means policyholders are also members.

That, in turn, means their with-profits bonuses were better than would be the case from insurance companies who had shareholders too.

But - as the Irish waiter in the Savoy Hotel asked George Best who was with Miss World in his hotel suite - where did it all go wrong? We can start with management.With-profits insurance companies are dominated by actuaries.They're the boffins who number-crunch anticipated events relating to investment returns, death and so on. They throw all this in a pot and work out what bonuses can be paid to investors.

What attracted most investors to with-profits was the fact that investment returns didn't keep them awake at night.

That's because actuaries kept a kitty so that, in bad years, money kept back from good years could still be paid out, keeping investors happy. But everybody didn't play by the rules.

Equitable Life, which blew up a few years ago, worked a different system.They controlled their sales people, who pretended to give advice instead of selling. They also claimed not to pay out commission and investors were attracted on this promise of a freebie.They didn't keep back money in a kitty, and claimed they'd invented a better system.

Actually, all of this didn't make sense, but Government-appointed regulators didn't see anything wrong. Incidentally, these regulators were supposed to protect investors' money.

So businesses such as Standard Life had to try to match the bonuses and returns of Equitable Life.

It was either that or they would have been flattened by this unfair competition.

Over the last 20 or so years, successive regulators from the Treasury to the Department of Trade, to the present Financial Services Authority, basically turned a blind eye to the practices of Equitable Life.

So the ba's burst.Will it manage to be whole again? I don't think so. Actuaries are going to have to work round the clock to rebuild the kitty, and that job has been made harder because regulators forced with-profits insurance companies to sell equities last year when, in fact, they should have been buying more.

Standard Life's not a bad company and if they're going to cut their costs that's not a bad idea.

If I had a Standard Life policy - which I don't - I'd probably keep hold of it for a couple of years.

If I had any other with-profits policy I think I'd go and get advice from an independent financial adviser.

Because not all with profits are up to standard.
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Title Annotation:Features
Publication:Daily Record (Glasgow, Scotland)
Geographic Code:4EUUK
Date:Nov 30, 2004
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