£1bn Norwich Union with-profits funds payout

Aviva today reported a 12 per cent rise in operating profit to £1.719 billion, despite the current economic slowdown, and the insurer has reached a deal over the inherited estate of £2.1 billion on with-profit funds.

In a deal over the distribution of the inherited estate, average cash payments of £1,000 to policyholders will be made as 70 per cent of funds will be returned.

As many as 700,000 people could receive a payout between £400 and £1,000, while 220,000 could be offered between £1,000 and £3,500, if policyholders accept the deal.

"This is an excellent result for our customers and shareholders," said Andrew Moss, Aviva group chief executive.

"Policyholders and shareholders will benefit from this ground-breaking deal, that is fair to all parties involved."

Clare Spottiswoode, who brokered the deal on behalf of Aviva customers in her role as policyholder advocate, said: "I am delighted that we have a deal that is in the interests of the great majority of policyholders. There is a substantial amount of cash on offer.

"Eligible policyholders are also benefiting from a very large distribution of some £2.1 billion related to the reattribution. This deal is good in all respects. It also provides a fair return to shareholders."

The FSA has now ruled its preliminary assessment was that Aviva’s £1 billion offer for the company’s inherited estate was fair.

Peter Vicary-Smith, Which? Chief executive, has called on the FSA to ensure policyholders' interests are fully protected.

"The FSA now needs to ensure that the deal contains sufficient safeguards to protect policyholders’ interests," he said. " They must also implement the changes recommended by the Treasury select committee and ensure that Norwich Union are held to their estimates and projections which form the basis of this deal."

He added: “Policyholders deserve a regulatory framework based on a clear set of principles which guarantees that all inherited estates are used in their best interests. The FSA needs to act now."

Aviva results out today show growth came from higher sales in North America and Asia Pacific offsetting "the more challenging markets of Europe, including the UK", explained Mr Moss.

The owner of Norwich Union will increase dividends by ten per cent to 13.09p.

The Aviva chief added the firm could benefit from the current downturn as the public turn to saving.

"Customers have naturally shown a preference for products with guarantees," Mr Moss said.

"Over the medium term economic analysis shows us that in tough times people do return to saving. They first cut discretionary spending, reduce debt and then focus on providing financial security for themselves and their families. Aviva can benefit from this behaviour."

Inherited estates refer to surplus assets in a with-profits fund which have built up over many years.

With-profits funds operate a technique known as ‘smoothing’. This means that some of the return from the investments in the fund is kept back in good years and added back to top-up returns during periods of poor performance.

Inherited estates often build up as companies hold back too much money.

Last month Prudential announced it was holding back its inherited estate from policyholders to use as a cushion against future stock market falls.