Raising Standard's hopes

Investors shouldn't hold their breath for windfalls if Standard Life floats, says Rachel Stevenson

Many of the 2.6 million policyholders of Standard Life thought they would never hear the company tell its members that the best way forward was to demutualise. Memories of 2000 will come flooding back, when the company convinced policyholders to reject demutualisation and the prospect of windfalls of as much as £6,000.

At the time, though, policyholders were enjoying record payouts and bonus levels; now more than a million are receiving letters telling them their endowment policy is unlikely to pay off their mortgage, so the prospect of windfalls will be more than welcome.

"Policyholders should see this as a positive thing," says Patrick Connolly of the independent financial adviser John Scott & Partners. "Standard needs more capital. A demutualisation and float would bring that through shareholders. If it were to continue as a mutual, it would struggle."

Anyone banking on some ready cash now, however, needs to remember that the proposal to demutualise will not be put to members until April 2006. Presuming that the board secured a 75 per cent vote in favour, it would still be some time after that that a float on the Stock Exchange would happen.

"I cannot understand why it would take so long for them to put forward a vote," says John Turton of the independent financial adviser Bestinvest. "There will be lots of people whose policies mature before then. And many others will hang on for a windfall when that might not be the best decision." Anyone whose policy does mature in the next two years would lose rights to windfalls. But Standard will allow you to roll your maturing policy into another with-profits policy to keep your windfall entitlement rights.

There is good news for customers who joined since 2000 and signed away rights to windfalls for three years. This three-year ban has been lifted: but anyone who joined since this week's announcement will be subject to a new three-year rule.

How much policyholders will get from a windfall is, at this stage, just a guess. Experts estimate the company could be worth about £4bn, and this could mean average windfalls of up to £2,000. But advisers are warning policyholders not to be too optimistic. "The company has said it has surplus assets of £4.6bn, but it is not going to give away all its assets or it wouldn't be able to function," Mr Turton says. "I think the payouts could be a lot smaller than some people are predicting, possibly in the hundreds of pounds rather than the thousands."

Unless the company is sold to another company before it floats, policyholders are likely to receive both shares and cash. In recent demutualisations, companies have often paid a flat fee, say £500, to compensate policyholders for losing their voting rights, and then some additional cash or shares. In some cases, policyholders have had received not cash, but bonuses paid on to policy values. "It is impossible to put a value on what the company might be worth and what windfalls might be in two years' time," says Sandy Crombie, chief executive of Standard Life.

Regardless of the size of windfalls, demutualisation could have an impact on future payouts. Standard has topped the payout league tables for many years, a record it has always attributed to its mutuality and the fact that it passes on all profits to policyholders.

So why the change of heart now, and will policyholder returns suffer if it becomes a plc? Mr Crombie says that the number of with-profits policyholders - the owners of the business - is falling. That means the capital available to fund the business is shrinking and the company needs access to more capital to continue to grow.

The company has also been caught out by new solvency rules, which have forced Standard to reserve for all its promises. This means policy charges are now similar to those from a plc insurer and its projected payouts rates have also come down. It can also no longer afford to keep so much of its policyholder assets invested in shares and had to sell £7.5bn earlier this year.

But whatever the fate of Standard Life, its reasons for demutualising should not spell the end of mutuality across the board. It had specific problems relating to the way it ran its with-profits fund and the expansion of the business using policyholder funds. Liverpool Victoria, on the other hand, says its business model is a strong and viable.

Malcolm Berryman, Liverpool Victoria's chief executive, says: "For us, mutuality is the most appropriate business model, without being distracted by shareholders' interests and the need to pay dividends."

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Why is it demutualising?

The company needs access to external capital to grow the business.

When will it happen?

The board does not intend to put a proposal to members until April 2006.

Who can vote?

Only with-profits policyholders. A vote needs 75 per cent to be successful.

Who will get windfalls?

All with-profits policyholders who took out a policy before March 31, 2004. If your policy matures before demutualisation, you will be able to keep it alive so you stay eligible.

How much will I get?

It would depend on stock market levels at the time and the structure of the demutualisation scheme. Some estimates suggest as much as £2,000, but others expect only a few hundred pounds.

What happens after it demutualises?

The company intends to float on the stock market, unless a buyer comes along.