Standard Life: the vote must be yes, but that's just the beginning

More than 2.4m Standard Life customers will finally find out how much they stand to make from the insurer's proposed demutualisation later this month, as the group plays its trump card in its bid to secure policyholders' backing for the transformation.

With the management requiring the approval of 75 per cent of its members to push ahead, it hopes the promise of cash will help convince the floating voters to come on board on the big day, scheduled for 31 May.

Although the Scottish insurer has been careful not to give too much away, analysts estimate that average share distributions will be worth in the range of £500 to £1,000. The exact details will depend on how long you have been a customer with the company and the size of your policy.

To qualify for the share distribution, you must have been a Standard Life member on 31 March 2004. Those who have been with the company for many years and now have sizeable policies could be in for windfalls worth several thousand pounds. But even with the windfalls on offer, should you vote yes to Standard Life's demutualisation? A report from a cross-party group of MPs, published last month, concluded that, historically, mutual companies have served their customers much better than their stock-market-quoted rivals.

It warned that windfall payments following previous demutualisations have generally been scant compensation for savers and investors for the subsequent decline in returns and customer service standards.

The explanation seems obvious. Publicly quoted companies have a duty to shareholders as well as customers, and the interests of the two must be balanced. As a result, the MPs warned demutualised companies' charges have a tendency to creep up over time, while savings rates and loan rates are often only competitive for the newest customers.

Mutuals, however, can put their customers first, which should in theory enable management to survive on slimmer profit margins, with more money left over for policyholders.

Nationwide, the UK's largest building society and one of the top three biggest mutuals in the country, operates with a profit margin of just over 1 per cent on its lending and savings balances. This compares with margins of as high as 2.75 per cent at Lloyds TSB, and 2.28 per cent at HSBC.

The MPs' report found that customers could lose the value of their windfall in higher charges and less competitive rates within four years of demutualisation. It warned that mutual customers tended to lack "a full understanding of what they were voting for" at decision time.

Some plcs have argued they run more efficiently, wiping out the gains of mutuality. And in the case of Standard Life, the insurer has not had much choice about maintaining its mutuality.

Solvency regulations that came into force a couple of years ago require insurers to keep much more money aside for every policy that they sell. As a mutual, Standard Life cannot raise money nearly as easily as a public company, and has struggled to meet the regulator's solvency requirements for its existing business, let alone find enough money to back any substantial growth in new business.

Although many of the company's senior management battled passionately to keep the company's status only six years ago, life for mutual insurance companies is now becoming increasingly challenging. Ned Cazalet, a life insurance analyst, says: "If it doesn't demutualise, it will have a lot of difficulties. I can't think of one reason why you can say it would not be sensible to demutualise."

Although the pressures of being a publicly listed company may well mean that customers see charges rise and service deteriorate over the next few years, things could be much worse for members if Standard Life maintains its mutual status.

Tom McPhail, head of pensions research for Hargreaves Lansdown, the financial adviser, says: "I like mutuality and I am a Standard Life policyholder. But it's really not in the interests of policyholders for Standard to remain a mutual. The best course is to take the money from demutualisation, then decide whether you want to remain a customer after that."

Should I stay or should I go?

* One option for Standard Life policyholders is: vote yes, take the shares then go elsewhere. But if you switch out of a with-profits fund, you're likely to be subject to a market value reduction (MVR).

* Like many insurers, Standard Life charges up to 25 per cent for switching out of your policy before maturity. Not all policies are affected though, so check.

* Returns across with-profits funds have varied dramatically over the past few years. If you put £100 a month into Scottish Widows' with-profits pension for the past 20 years, you would now have a fund worth £48,000. Savers with Liverpool Victoria would have almost £90,000. Liverpool Victoria is still mutual, Scottish Widows demutualised five years ago, though there is no automatic correlation between high returns and mutuality.

* Many advisers believe with-profits products have had their day. If you're thinking of switching, take professional advice. To find an adviser, visit www.unbiased.co.uk.