1 What is an orphan asset?

Orphan estates are akin to the pennies lost forever in the nation’s sofas. Some of these assets were once profits made by the with-profits fund that were held back in case of emergencies. The rest arise because people have bought a stake in a with-profits fund and forgotten about it for some reason. Over the decades, these lost policies build into the orphan assets, otherwise referred to as inherited estates.

2 Who owns the assets?

Consumer groups, such as Which?, believe that the ownership of any surplus capital should be split in the same way as any income from a with-profits fund: 90 per cent to the policyholders and 10 per cent to shareholders. Which? fought an unsuccessful battle in 2000 against a distribution of £1.7 billion in orphan assets by AXA, the French insurer. Most life insurers argue that shareholders deserve a bigger slice. AXA’s policyholders ended up with about 45 per cent.

3 How will it be divided?

It is too early to say how NU will dole out the assets, but it’s safe to say that shareholders will gain more than 10 per cent. Once the insurer decides who owns what, it is likely to pay cash in return for the policyholders’ stake in the estate.

4 Will I be eligible?

NU is the product of a series of mergers, demutualisations and takeovers. Basically, if you were a policyholder of the old Commercial Union or General Accident, you will be entitled to a share. Policyholders who bought their policy from the original Norwich Union, or from Provident Mutual, will not receive any cash.

5 Show me the money

The estate is worth £3.3 billion, and about 1.4 million policyholders have a stake. But the shareholders will receive at least £1.2 billion. Individual payouts will depend on the size of your policy. Some experts predict that the average could be as low as £400.

6 Why is NU doing this?

Insurers use orphan estates like a massive financial cushion, helping them to write new business and to weather economic storms. Once NU decides who owns the estate, it can use the bit controlled by shareholders to expand the business further. NU has big ambitions overseas.

7 People power

In many cases a fight between policyholders and shareholders will be a David and Goliath affair. But when an orphan estate is involved, the policyholders do receive some help. Any split must be approved by the Financial Services Authority, the chief City watchdog. In addition, NU is looking for a “policyholder advocate” to represent policyholders in the negotiations with shareholders. This is likely to be some eminent worthy, such as a law lord or former politician.

8 Sparks will fly

Although Which? lost to AXA in the battle over its orphan estate, the consumer lobby group will not sit in silence as NU formulates its plan. Which? has described the distribution of orphan estates as “legalised theft”.

9 Don’t hold your breath

NU is likely to unveil further details of the scheme late next year and payouts are unlikely before 2008.

10 What should I do?

Nothing. Sit tight and wait for the actuaries to fight over the details. Do not let a possible £400 payout affect any decisions on when to retire or whether to keep up your underperforming pension.