Reattribution
A firm may restructure the with-profits fund to give it more freedom to use the money. Policyholders normally receive a one-off cash payment as compensation. This page tells you
about the reattribution of inherited estates. We recommend you read With-profits policies and What insurers must do first.
What is an inherited estate?
An inherited estate is part of a with-profits fund. It is the part of the with-profits fund over and above that needed for the fund to meet its immediate liabilities, such as payments to policyholders and expenses. In most with-profits firms the inherited estate has built up over many years and usually consists of several generations of with-profits policyholders’ investments which have been retained and not distributed; and/or it may also be made up of past injections of money from shareholders.
Legally, a with-profits fund (including the inherited estate) is an asset of the insurer (the firm). A firm uses the inherited estate in various ways – including as security for policyholders against adverse market conditions, such as significant falls in the stock market, and as working capital for the fund. The management is responsible for deciding how much capital in the inherited estate the fund needs to retain.
The inherited estate will not be distributed or used to increase the payouts under policies unless it is not needed as security for the fund or as working capital, and so policyholders may not receive any distribution from the inherited estate during the life of their policies.
What is a reattribution?
Reattributions are not everyday events, and most firms may never carry out a reattribution.
In a reattribution, a firm restructures the with-profits fund so that it can use some of the capital from the fund to support its activities outside the fund, such as reducing management costs. The result is that the firm then has greater access to the funds from the inherited estate and more freedom as to how to use that money.
As part of the reattribution, the firm effectively buys out policyholders’ interests in the inherited estate. Policyholders normally receive a one-off cash payment as compensation for the interests they are giving up.
At the same time as a reattribution, or separately from it, the firm may make a Distribution. Under this process the firm decides that some of the capital in the inherited estate is no longer needed as working capital or for other purposes, and that it can be paid out to policyholders and shareholders according to their shares in it. A distribution may be paid by increasing policy values for policyholders or as cash, and may be paid out at once or over a period of time.
Who is involved in a reattribution
1. The policyholder advocate
The firm appoints a policyholder advocate (PA) to negotiate on behalf of all the with-profits policyholders – whether they have a with-profits bond, mortgage endowment, pension or other with-profits policy. It is the PA’s job to represent policyholder interests and negotiate the value of benefits offered to policyholders in exchange for the rights and interests they are asked to give up. The PA is independent of the firm and the FSA must approve or nominate him or her.
As well as negotiating with the firm the PA may also need to, for example:
- comment on the criteria the firm proposes to use to decide which policyholders are eligible to receive a payment; and
- comment on the calculation the firm will use to decide how much policyholders will receive.
The PA will always prepare a report to policyholders on whether the firm's proposals are in their interests.
2. The FSA
The Financial Services Authority (FSA), the UK's financial services regulator, does not take part in the negotiation between the PA and the firm – its role is to oversee the process and assist if appropriate. It looks at whether it appears the PA and the firm are able to conduct a full and fair negotiation. For more information on this process, see its website.
When the negotiation is finished the FSA assesses the final proposal to see if it is fair to policyholders. Its assessment of fairness starts with the proposal to divide the value of the available money between policyholders and shareholders. The reattribution proposal is compared with policyholders awaiting a potential future distribution where 90% is distributed to policyholders and 10% is distributed to shareholders.
There is no guarantee that policyholders will get a distribution in the future, so the reattribution involves a negotiation to agree an amount which policyholders will receive now against the possibility of a higher amount in the future. Additionally the FSA looks at the value shareholders are receiving, and compares the balance between the shareholders and the policyholders.
It wants to be satisfied that all current policyholders are no worse off as a result of a reattribution from the position than they could reasonably have expected to be in if the reattribution had not taken place.
3. An independent or reattribution expert
The firm will appoint an expert, who is called either an independent or a reattribution expert. This will depend on the legal process the firm has chosen to use for the reattribution. The FSA has to approve the expert. The expert’s role is to examine the reattribution proposal and to report on the effects of the reattribution on policyholders’ interests and security.
4. The High Court
The High Court may be involved in the process. The High Court will review all the evidence, and will consider the independent expert’s report and any representations that are made by the firm and policyholders. The FSA may report to the Court and may appear at Court to make representations. The Court will allow the reattribution to go ahead if it is satisfied in all the circumstances that is it fair to do so.
What you need to know if your insurer is proposing a reattribution
Your insurer will write to you to explain:
- the reattribution process – including the role of the policyholder advocate;
- the reattribution proposals – what they are, how they affect you, an explanation of any benefits you are likely to receive and the rights and interests you are likely to be asked to give up; and
- the policyholder advocate's views on the reattribution proposals.
How much money will you be offered?
This depends on the circumstances of the reattribution and the outcome of negotiations between the firm and the policyholder advocate. Also issues such as the size and likelihood of any future distribution taking place and the value of shareholders' rights and interests. The firm should explain to you how it arrived at its proposal.
Do you have to accept the proposal?
Your insurer may offer you the chance to vote individually to accept or reject their proposal or it might decide to put the proposal to a majority vote.
More information
Look in your policy documents or your insurer's guide to with-profits. If they are carrying out a reattribution you should be able to find out information on their website. They should also be able to answer factual questions about your policy, but may not be able to advise you what to do.
If you are unsure what to do you should speak to a financial adviser – see Getting help with money decisions.
