Norwich Union cuts longer term policy payouts by 11%

Britain's biggest insurer, Norwich Union, yesterday added to the gloom surrounding mortgage endowments by cutting payouts on maturing, longer- term policies by up to 11%.

The company yesterday announced a package of bad and good news for holders of its 3m with-profits policies - including a million mortgage endowment customers and 1.1m pension plan holders.

The payout reductions come despite the fact that the company's main with-profits funds notched up an investment return of 11.5% before tax in 2004, beating the FTSE 100 index's 7.5% rise.

But Norwich Union softened the blow by revealing that, unlike Scottish rival Standard Life, it is not abandoning its promise to help bail out mortgage endowment customers facing shortfalls, and has put aside £1bn to pay for its pledge.

Mike Urmston, the chief actuary at Norwich Union Life, said 2004 was a "fairly good" investment year, but added: "The last two years of positive returns have not compensated for the negative returns of the previous three years."

A typical maturing £50 a month, 25-year General Accident endowment will from this month pay out £57,279.

This is some 8.9% less than the £62,888 an equivalent policy was delivering a year ago, and compares with a payout of £66,394 in July 2003 and £85,518 in August 2002.

These figures are for savings endowments; for mortgage endowments the new typical payout figure is even lower, at £52,576. However, the company said its policy payouts still compared favourably with other investments and had produced good returns.

All its maturing 25-year mortgage endowments are producing surpluses over and above the target amounts, but its 15-year mortgage endowments are falling short.

In most cases, annual bonus rates are unchanged against last year's. However, the number of policies that will not receive any annual bonus this year has swelled to more than 300,000. The majority of the people affected hold old-style "conventional" with-profits pension plans.

There had been speculation that Norwich Union might try to back out of its "mortgage endowment promise" launched in 2000 to help people facing shortfalls on their home loans.

A spokesman said the company believed the promise remained viable and had reserved £1bn to pay for endowment shortfall assistance, which he said showed "the weight we are putting behind it". He added, however, that if stock market conditions were to change significantly in the future, the promise might have to be reviewed.

The company has also reduced its "market value reductions," the exit penalties that affect people who cash in their policies early or move their money to other insurers. But they remain as high as 18%.