Standard Life cuts board bonuses over wrong call on equities

Standard Life, the UK's largest mutual insurance company, has admitted it made the wrong call on the equity markets over the past three years and its senior executives are set to pay for the misjudgement with cuts to their own bonuses.

The insurer defied its rivals and maintained a high proportion of its £34bn with-profits fund in equities while stock markets declined sharply. It had £27bn invested in equities at the start of the year. This position has hit its once enviable reserves hard.

"With the benefit of hindsight, equities haven't been a good place to be, but our decision to be in equities is part of a long-term investment strategy," said Gordon Arthur, head of communications for the Edinburgh-based Standard Life. "We never wanted it to happen but this fall is something we have planned and reserved for. We always knew there is a risk equity markets would fall but it has been part of our risk management to come through it."

Standard Life will produce a statement over the next couple of weeks showing its current asset mix, which it says should reassure investors its balance sheet is still strong. "We are a strong office," Mr Arthur said.

The company took the strategic decision to stay invested in equities during the bull run at the end of the 1990s, believing that equities would outperform other assets in the long term and generate the best overall returns for policyholders. But Standard has seen its free assets fall from £8.4bn to £3.3bn in 2001.

Standard Life reports its full-year figures on 15 November, when more details of its directors' remuneration packages will be made available.

The mutual is likely to report impressive sales figures as it has been competing aggressively for market share in the past year. But the performance of the with-profits fund is likely to eat into bonuses paid to its senior executives, headed by the chief executive Iain Lumsden.

Standard Life last month abandoned its resistance to cutting policyholders' bonuses when it reduced payouts by 10 per cent and levied a market value adjustment – an exit penalty – of 10 per cent on policyholders who cash in early.

It has come under increasing pressure to update policyholders on its capital position. As a mutual organisation, it escapes the reporting procedures of listed companies. Standard Life successfully fought off a demutualisation campaign in 2000 led by the Monaco-based fund manager Fred Woollard and has remained resolutely mutual ever since.

But it says it will now strive to adopt the best aspects of plc behaviour. Half-yearly reporting, bringing its year-end in line with other companies, and more regular trading updates and bonus announcements are soon to be part of the mutual's financial calendar.