Norwich Union is to pay 1.1 million with-profits policyholders a £2.1 billion bonus in a move that could encourage a vote for the redistribution of its surplus funds.
The Aviva owned insurance giant will hand over the bonus to policyholders in its CGNU Life and CULAC with-profits funds by enhancing the value of their policies by 10% in three instalments over the next three years. Shareholders will also receive £230 million.
Mark Hodges, chief executive of Norwich Union Life, says: “This special bonus is a major boost to policy values.”
However, Nick McBreen, an independent financial adviser at Worldwide Financial Planning, says Norwich Union is trying to tie people into its funds by splitting the bonus over three years.
He adds: “This bonus is compensation to policyholders whose investment has had an appalling performance over the past few years. Policyholders should still review their policy in-line with their continued needs and expectations.”
The bonus makes up less than 50% of the firm's surplus fund. Matt Pitcher, wealth adviser at IFA Towry Law Group, says: "The money being distributed is split 90/10 between policyholders and shareholders - but it will be interesting to see how the remaining money will be shared out. Next time policyholders could receive less, and shareholders more."
Norwich Union has also announced that it has made a request to policyholder advocate Clare Spottiswoode, who was appointed to protect the rights of policyholders, to buy eligible policyholders’ interest in the “inherited estate”.
This would see up to £5.5 billion of surplus in Norwich Union’s with-profits funds freed up. The company wants to have more control over this cash, currently used as a buffer to protect the funds during periods of underperformance.
It is currently negotiating a deal with Spottiswoode about how much money to offer policyholders in exchange for control of the inherited estate. This money is generally considered to belong to policyholders and should be split 90/10 between them and shareholders.
But Matt Pitcher says that in reality it is in Norwich Union's interests to give more money to shareholders because this will raise its share price. Norwich Union has refused to say how much of the money will be paid to policyholders. But a spokesman points out that the inherited estate does not automatically belong to all policyholders as it has been built up over a long period of time.
Once a deal has been agreed, policyholders will be asked if Norwich Union can buy their rights to the inherited estate. If policyholders do vote for "reattribution" then they will lose their right to any future distribution of the inherited estate.
It is estimated that 50% of policyholders eligible to vote have between five and seven years left on their policies. With another distribution unlikely during this time, they may well be more likely to vote for reattribution.
Matt Pitcher says: "Policyholders are likely to vote for the short-termgains and therefore waive their rights to the rest of the surplus. Thisis good for Norwich Union as it wants to keep its shareholders happy."
However, there is concern that the deal offered to them by Norwich Union might not be as attractive as many hope, meaning policyholders could be entitled to receive more money by holding out for future distributions.
Consumer groups such as Which? is calling on Norwich Union to hand over the remainder of the surplus to policyholders.
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