selling scottish provident endowment

Selling a Scottish Provident Endowment Policy

Press Article

The Guardian, Saturday September 9 2000

Demutualisation bonanzas could prove illusory for hundreds of thousands of Scottish Provident policyholders. They should look carefully at their documentation before planning how to spend the windfalls promised following Abbey National's swallowing up of the Edinburgh life insurer.

sell scottish provident endowmentThey will also need to check just when their policy was issued - the rules for some older policies are more generous than for those issued over the past four and a half years.

After being "in play" for some months, Scottish Provident finally threw in the mutuality towel this week when it said it was falling under the Abbey National umbrella where Glasgow-based life company Scottish Mutual has resided since 1992.

Continuing as a mutual made little sense, it believes, especially as it now specialises in protection plans, such as life or critical illness cover, rather than traditional with-profits business. And while it will not publicly admit it, the other touted option - a stock market float - would not have succeeded due to the firm's relatively small size.

Demutualising means policyholders lose out because they no longer own the entire with-profits fund. It has to be shared with outside investors - in this case Abbey National which will be paying 1.8bn for the life company.

In return for giving up their vote and part of their share in the proceeds, the 325,000 with profits shareholders will end up with windfalls averaging around 4,500 - near enough the eventual level paid out last month by Scottish Widows and substantially ahead of the typical amount on offer from pensions specialist NPI. They will also receive a further 1,500 on average in "enhanced policy benefits" - although just how holders will be made aware of this in these notoriously opaque funds is not clear.

With-profits policyholders include those with pension plans - where sales to new investors stopped in 1997 - and endowment policies. Scottish Provident endowments were sold to back mortgages by independent financial advisers.

The life insurance company is currently sending out review letters to homebuyers. It says "an average number have a shortfall". Scottish Provident stopped selling endowments late last year. According to Money Management, returns on 25-year policies maturing this year were below average.

The typical 4,500 payout may be improved - the Scottish Widows windfall went up as actuaries refined their sums. And that average amount will vary from a minimum 500 to a possible 100,000 plus for the very biggest long-term pension plans.

A further 125,000 policyholders who have non-profits plans, such as unit linked investments into both pension and endowment plans, are members but will not lose financially when mutuality disappears.

Investors in these funds will receive a flat 500 irrespective of the size of their holding. This is identical to the payout offered by Scottish Widows to their unit linked and non-profit customers.

But around 350,000 Scottish Provident policyholders will get nothing. They have no membership rights, although it is doubtful if this was ever pointed out to them by the independent financial advisers (IFAs )who sell all Scottish Provident plans.

The great majority of these - some 300,000 - have bought protection policies such as life, income replacement, critical illness and medical cover.

These have all been sold under the "Self Assurance" label. Scottish Provident has been very successful in replacing pensions and endowment sales with IFA based sales of protection - it is by far the biggest supplier of these plans in the independent area.

But oddly anyone who bought and still holds a protection policy sold before January 1996 counts as a member and will qualify for the flat 500 payment.

Around a further 40,000 policyholders are also excluded from the 2bn payment bonanza. They are holders of plans bought from the offshore arm - Scottish Provident International. This is legally a subsidiary of the with-profits fund so they do not have membership rights whatever policies they hold.

Abbey National customers receive nothing, although shareholders could profit if the deal lives up to the promise. Abbey's 15m account holders could see cheaper life cover if Scottish Provident products are sold in branches at the same price as sales through IFAs, and if sales of Aberdeen unit trusts are routed through branches.

Aberdeen, which is 39% owned by Scottish Provident, is being sacked in August 2002 as Scottish Provident's main fund manager in favour of the Abbey National in-house team.

The timetable now points to a vote on demutualisation early next year - probably at the end of January. Barring cataclysms, the result is a foregone conclusion. This will be followed by a virtual rubber stamping at the Court of Sessions in the summer.

With-profits policyholders will then be told exactly how much they stand to make. And all windfalls will be paid out in autumn 2001.



The association of friendly societies



Royal Liver Assurance, one of the country’s leading Friendly Societies, has announced as part of its 1999 Bonus Declaration, a special bonus in celebration of its 150th Anniversary which will be paid to all with-profits policyholders.

Like many other financial services providers, Royal Liver has restructured its reversionary bonus rates this year to reflect difficult market conditions with interest rates at their lowest levels for many years.

Brian McCaul, Royal Liver’s Chief Executive, commented “We are extremely pleased to be able to reward policyholders with this special 150th Anniversary Bonus, in addition to increasing or maintaining our terminal bonus rates. As a Friendly Society, we work for our members, not shareholders, and this announcement reinforces our commitment to offer them good value for money and a fuller future”.

With many organisations cutting overall payouts significantly, this is a major achievement for the Society. The 150th Anniversary Bonus will effectively mean that the overall rates declared to policyholders will remain the same as last year.

As a result of the 1999 declaration, the Society’s Ordinary Branch endowment plans will enjoy a reversionary bonus of £30 per £1000 sum assured for non-compound bonus policies and 2.5% for compound versions. The 150th Anniversary Bonus will add £15 and 1% respectively to these values, bringing the totals to £45 and 3.5%.

The Society launched a highly flexible new-style personal pension plan towards the end of 1998 and with-profits plan holders will benefit from an annualised bonus value of 4% plus 1% ‘Anniversary’ rate, bringing the total to 5%.

In practical terms, a typical 15 year endowment policy taken out on 1 January 1985, by a 30 year old male paying £60 per month, will mature this year with a value of £27,925. This equates to a substantial growth of 158% on the total contributions (£10,800) with all taxes paid. Compared with a typical building society return of £15,033* the Royal Liver plan clearly offers excellent value for money. 

Commenting on the special bonus and other developments at Royal Liver, Brian McCaul said “This is an exciting time for the Society which is successfully blending 150 years of experience and tradition with major new initiatives and a determination to ensure continued success in the 21st Century.”