Prudential, the insurer, dropped plans yesterday to return to policyholders some of the £8.7 billion of excess capital in its with-profits fund in a move that will enrage many of its 4.5 million customers who will miss out on a windfall.

Britain’s second-largest insurer told policyholders that they would be denied any payout from its inherited estate – the surplus that builds up in a fund. The insurer’s embattled shareholders will also receive nothing.

Nick Prettejohn, the Pru’s UK chief executive, said that the company had made its decision “after comprehensive and extremely complex analysis”. It had concluded that the operating model for its £79.1 billion with-profits fund was still in the best interests of policyholders, as well as shareholders, he said.

After trawling through the details of millions of policyholders, Mr Prettejohn said, individual payouts would have been small against the estate’s size. It is thought that the average payout would have been as little as £25.

Mr Prettejohn said that the Pru was moving to protect the strength of the fund, as well as the interests of future policyholders. “The most important thing is the performance of the fund,” he said. “We are also looking at the interests of future, as well as current, policyholders.” The decision comes after Pru executives, including Mr Prettejohn, underwent tough questioning by the Commons Treasury Select Committee this year.

Also represented at the hearing was Aviva, the owner of Norwich Union, which is in talks with Clare Spottiswoode, the policyholder advocate, over the terms of a potential payout to more than a million customers. The Pru appointed its own policyholder advocate, Peter Bloxham.

The decision comes after the Financial Services Authority (FSA) embarked on a review that could prevent insurers from using inherited estates to pay mis-selling claims. The Pru has paid out £1.6 billion so far. This incensed MPs at the hearing.

In their subsequent report, published this month, the select committee berated the FSA for failing to tackle the innate conflicts of interest between insurers and policyholders in relation to decisions about the future of surplus with-profits funds.

In a reattribution of an inherited estate, policyholders receive a one-off cash sum in exchange for giving up rights to future bonuses from the fund.

Insurers argue that they need the excess funds to underwrite new business and maintain the fund’s strength.

Analysts at Keefe, Bruyette & Woods welcomed the Pru’s decision. They said that it removed a “poison pill” that had prevented activist funds from pushing for a restructuring of the insurer.

Mr Prettejohn denied that the Pru had been put off by publicity about inherited estates. He said that the Pru was unlikely to revisit the plan “in the near or medium-term future”.

Dominic Lindley, of Which?, the consumer group, said: “Our initial reaction is that policyholders need to be confident the inherited estate will be used for their benefit. The current FSA regulations don’t do enough to protect their interests.” Which? would call for “rigorous and independent assessment” of the insurer’s inherited estates to establish whether they have surplus capital that might be distributed, he said.

Pru shares fell 1.6 per cent to 542p.

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