Big bonuses for some at Double Standard Life

ON COURSE in Volatile Times". Such are the soothing words on the front cover of my Standard Life annual meeting voting pack, complete with picture of a compass pointing firmly north.

On course at Standard Life? You could have fooled me. For the past 12 months it has had to contend with the most difficult stock market conditions for a generation. These are tough times for savers and investors.

But for Europe’s largest mutual life office especially, this has been the Year from Hell. Its investments have suffered the worst percentage falls in value for 30 years. Its determined bet on staying with equities has been pursued at a colossal short-term price. Its long-term reserves have plunged by £4 billion. It has lost its coveted triple AAA rating for financial strength. It has been obliged to seek from the Financial Services Authority a waiver on its solvency requirements.

And most publicly of all, it has been forced to cut pay-outs on long-term policies three times over this dire period. The latest cut last month was an average 15 per cent reduction in maturity values. At the same time, the penalty for surrendering or transferring pension policies has been raised to a penal 25 per cent.

So it was with surprise, to put it no stronger, that I read of the latest pay arrangements for the boardroom. Iain Lumsden, the chief executive, is to get a 26 per cent increase in his overall remuneration to £619,000, including a performance-related bonus of £136,000. In addition, he is to be paid £124,000 under a rolling three-year incentive plan. Last year, he accrued a further £140,000 under this plan, bringing the amount awarded and payable in future to £402,000.

His deputy, Sandy Crombie, is to be awarded a 20 per cent increase to £520,000, this sum including a performance-related bonus of £122,000. In addition, he will receive a further £66,000 under the long-term incentive plan. The amount awarded but still to be paid under this plan stands at £158,000.

For Scott Bell, who retired as group managing director last year, there is a pay and performance-related bonus package of £351,000. Under the long-term incentive plan, he receives an additional £764,000. On top of this is a pension of £420,000 a year.

For many policyholders it will require a leap of the imagination to figure out how the same company that slashed bonuses to long-term savers in the face of huge investment losses - and is warning them to expect more cuts in future - is the same company awarding directors such hefty performance-related bonuses. For customers of a public company whose shares are quoted on the stock market, this would be difficult enough to swallow. But for a company that has set such store by its mutual status and the identity of interest between policyholders, proprietors, staff, and management, it is an affront.

Little wonder that there is a talk of a revolt by policyholders at the forthcoming annual meeting. As many see it, the idea that the directors award themselves bonuses while policyholders, the owners of the business, are forced to accept bonus cuts by the same managers smacks of double standards at the heart of Standard Life.

The company makes several points in its defence. Overall boardroom pay is down on the previous year. Performance bonuses conform to an agreed formula set out in the accounts. Senior directors, even after these bonuses, are still paid less than their peers in other life assurance companies. And new premium income is up.

All these points are true. But are they the points that matter? The fall in the aggregate total of boardroom pay is partly a reflection of personnel changes rather than any intended cost reduction. Whether, given the bonus awards already in the pipeline, this will be a sustained reduction is moot. In any event, the £500,000 fall in boardroom pay overall should be seen in the context of a £16 million increase in net operating expenses.

The formula for calculating the long-term incentive plans is set out in a note to the accounts. It is so opaque as to make it impossible for a policyholder to grasp exactly how it is calculated, still less whether it is fair or not. "Where peer group comparisons are made," it reads, "performance factors are nil for performance below median, 0.3 for median performance, 1.0 for performance equal to or better than upper quartile and straight-line interpolation between 0.3 and 1.0 for performance in between median and upper quartile."

Got that? This statement is so glacial, its meaning so impenetrable as to be about as useful an order of words as dribbled mince. But I can only imagine that at every board meeting the chairman, John Trott, proposes a motion of deep and lasting gratitude to the remuneration consultants, Towers Perrin, for the most unfathomable incentive formula ever drafted, and that the directors raise their tumblers for a toast ... "To dribbled mince!"

Aside from its lack of transparency, the notion of "peer group review" in the current state of Britain’s pensions and insurance industry is deeply flawed. For example, it can hardly be right to use the Prudential as a remuneration peer. This is a company whose shares have plunged more than 70 per cent in two years; whose dividend is in doubt and whose board was forced by the prospect of a mass rebellion of shareholders to scrap a controversial executive pay scheme that would have handed its chief executive, Jonathan Bloomer, up to £4.6 million in future bonuses. Little wonder there is near total breakdown of trust among retail investors.

A major factor behind the growth in Standard Life’s new premium income has been the flood of desertions from the stricken Equitable Life. Policyholders have crossed over in their thousands - but only to find that they have gone from the frying pan into the fire. That pretty well sums up the state of the entire insurance sector right now.

Of what possible credibility is "peer group review" when the insurance industry across the board has found itself under siege for pensions mis-selling, endowment policy mis-selling, herd-like over-commitment to equities at the expense of balanced asset allocation and problems over solvency?

The collapse of confidence among the investing public requires a complete and radical break from the appalling mismanagement of the past decade.

Britain’s life assurance industry was once the pride of the world. Its reputation is now in tatters and public confidence in its products and services at near rock-bottom. This collapse has gone hand-in-hand with a poverty of leadership and idea. Policyholders look to a mutual office for a set of values that has some concern for their interests, not for a blind following of bad example elsewhere.

This corrosion of confidence is why the boardroom pay splurge is not simply an own-goal by the company against itself, but against the system and the market that it represents. Central to any sustained recovery in retail investment is a recovery in public trust and that sense of shared values.

It is to help make that recovery possible that I will be voting against the company on its resolutions at the annual meeting, and why others will also be doing so.

On course at Standard Life? Not on this form.

The Standard Life meeting is at the Edinburgh International Conference Centre on Tuesday, 22 April, starting at 2:30pm.