A GROUP of Standard Life members has threatened the insurer with investigation by the Financial Services Authority if it slashes bonuses and pay-outs this year purely in order to fatten the company up for flotation in 2006.

The policyholders yesterday made a public appeal to chief executive Sandy Crombie not to make artificial reductions for "corporate reasons" ahead of the vote on demutualisation in a year's time.

They said that if the FSA were unable to rule out such reasons playing a part in the setting of pay-outs and bonuses, due to be announced next Tuesday, they would "seek compensation".

The appeal came in an "open letter" in a national newspaper signed by London-based policyholder Eleanor Elfer, five other signatories and 42 supporters, addressed to Standard's chief executive Sandy Crombie.

The letter begins by congratulating Crombie on his "success in putting the company back on track" and on foregoing his pounds-500,000 bonus this year, but goes on to warn:

"New directors often paint an overly gloomy picture of their company's inherited status, ensuring them to appear as the one who 'turned the company around'. Presiding over a company with 'with-profit' funds, there is great temptation to use what is called 'smoothing' for this purpose."

Larger than necessary cuts could lay the foundations to enable bonus or pay-out increases next year, the group claims. "Cutting pay-outs for reasons of achieving corporate goals is illegal. It robs money from policyholders whose policies mature this year."

The letter says management is under pressure to "demonstrate positive achievements immediately before the vote".

The fear was that bonus cuts would be exaggerated now because Standard would want to be "absolutely certain no cuts or standstill will be necessary in spring 2006".

The letter concludes: "Standard Life as a company has fared very well in 2004. Withprofit investments grew in excess of 18-per cent, but with-profit pay-outs were slashed terribly . . .

If Standard Life were to cut payouts again now and increase them in 2006, we would ask the FSA to investigate if all cuts were purely for the benefit of withprofit policyholders. Were the FSA to find that 'corporate reasons' could not be ruled out as having played a role in setting the level of any pay-out reduction, we would then seek compensation."

Standard Life said it would be replying to the letter but commented: "Our bonus philosophy is driven by our overriding objective of treating policyholders fairly - a principle enshrined in our 'Principles and Practices of Financial Management'. An FSA requirement, this sets out in transparent terms how we run ourwithprofits business and, amongst other things, determine bonus rates. Our adherence to those principles is subject to external and independent audit and the findings are also published externally."

Meanwhile the FSA yesterday published new rules for the managing of with-profits business, following its review of the sector begun four years ago.

The rules cover fund management costs, surrender penalties, a target range for maturity payouts, more easily understandable information to policyholders, transparency when a fund is closed, and the appointment of a "policyholder advocate" if a firm decides to make a reattribution of its inherited estate. The majority of the changes will come into force at the end of June, with a sixmonth transition period.

David Strachan, the FSA's sector leader for insurance, said: "The new rules will bring further transparency and accountability to the with-profits sector."

However Mick McAteer, principal policy adviser, Which? , said: "In our view these rules represent a retrograde step, putting even more power and discretion in the hands of directors. Directors will be able to carry on protecting shareholder interests by using withprofits funds as a slush fund to pay compensation costs."

McAteer went on: "Withprofits policies are still one of the riskiest products people can invest in. The FSA has done nothing meaningful to ensure that firms spell this out."