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Standard Life disputes endowment shortfall fears

Patrick Collinson
Saturday March 1, 2003
The Guardian

Standard Life, Europe's biggest mutual insurer, yesterday saw its annual results announcement clouded by continuing uncertainty over the cost of its promise to make up shortfalls faced by hundreds of thousands of endowment customers.

The Guardian reported yesterday that Standard Life could face a bill of up to £4.8bn to meet a promise to endowment holders made in 2000. Standard Life disputed the figure, although it confirmed that the majority of its 1.5m endowments are now not on target to cover the repayment of a mortgage.

The deputy managing director, Sandy Crombie, said the insurer has quantified the amount required to meet the promise in full, but will not disclose the figure.

"We think it would be used for sensationalist headlines," said Mr Crombie. "Our financial strength remains excellent."

Standard Life confirmed it has set aside £100m a year since 2000 to meet the cost of its endowment promise, a figure which it said it is not planning to increase despite the collapse in stock markets. The bulk of its endowments will mature over the next 15-25 years.

The finance director, John Hylands, said: "The current provision stands at just under £300m. We would expect to go on adding to that provision at a rate of £100m a year and that will provide fully for the maximum amount that we could have to pay over the next 25 years."

That suggests the potential bill could total at least £2.8bn.

Standard Life said that its sales were up and its costs down, and that the key indicator used to measure its solvency was better than most rivals.

But it admitted that it was using for the first time an accounting device which allows it to book £1.5bn of profits which it expects but has not yet made. It joins many other weakened insurers already using this practice.

Concern over the cost of endowment liabilities comes at a time when all insurers have seen their financial strength sapped by falls in the stock market.

Standard Life confirmed it will be seeking a waiver from the solvency rules imposed by its regulator, the Financial Conduct Authority. Other insurers, including Norwich Union, are also expected to apply for a waiver.

Standard Life's £30bn with-profits fund is also facing a potential bill for guarantees the insurer made on pension contracts it sold in the 1990s, which contained a promise of 4% a year growth. Last year the insurer achieved a negative return of 12.5%.

"Everybody is looking at Equitable Life and asking, are there guarantees that other companies are not reserving for properly," said Mr Crombie. "They are using these guarantees as a bogeyman. It is simply not an issue for us. All our guarantees are properly reserved for and no one should be concerned about the future of Standard Life."

But Standard Life's fiercest critic, independent City analyst Ned Cazalet, said the society's solvency position had fallen to dangerously low levels. Standard Life dismissed Mr Cazalet's figures as "nonsense."

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