Norwich Union cuts with-profits bonuses

Norwich Union announced a cut in bonuses for with-profits policyholders today, in spite of a second year of positive returns in its funds.

The firm declared bonuses for 2004 of ?1bn for 3m with-profits policies, a better rate of pay-out than expected in a troubled area of investment.

With-profits policies are designed to smooth out the peaks and troughs of the stock market by keeping profits made in good years in reserve to enable them to pay an annual bonus to policyholders in years where the stock market performs badly.

Norwich Union said it had cut some regular bonus rates on its policies in view of the level of guarantees already built up, but said that policy pay-outs continued to compare favourably to other investments.

A 25-year ?50-a-month CGNU mortgage endowment will pay ?52,576 following today's announcement, compared to ?59,444 last year, while a 20-year ?200-a-month pension is worth ?113,392 as opposed to ?120,978 12 months ago.

The company also pledged that its mortgage endowment promise would ensure that no homeowners with policies maturing this year would face a mortgage shortfall.

The company announced positive returns of 11.5% on its CGNU and CULAC with-profits funds in 2004, an increase that will be passed on to policyholders through the underlying value of their funds.

However, the firm said that the last two years of upward movement in the stock market had not managed to cancel out the dismal returns of the previous three years. The FTSE 100 ended 2004 at 4,814, around 2,100 lower than its 1999 peak of 6,930.

Mike Urmston, chief actuary of Norwich Union Life, said: "Our with-profits funds have seen a second year of positive investment returns which has resulted in an increase in the underlying value of customers' policies. Policies maturing continue to pay competitive returns and compare well to other forms of investments."

He added: "We are also taking this opportunity to restate our commitment to support customers through our mortgage endowment promise where we have set aside ?1bn to support this promise.

"We believe that this valuable promise is sustainable under today's market conditions given the strength of our with-profits funds."

Conventional life, investment and pension policies with a term of 20 and 25 years will be lower by 6% to 10%, while single premium pensions over the same term will be lower by 5% to 10%.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said the pay-outs were largely what was expected, but were certainly better than some investors with other providers could hope for.

"Payments are coming down and we would expect to see cuts in pay-outs. It's unfair to hold Norwich Union up for too much criticism - their fund grew by 11.5%, and they are right to say they delivered a good investment return.

"On 25-year ?50-a-month endowment mortgages, we were expecting pay-outs of around ?40,000 to ?60,000 this year, and their figure is certainly respectably within that range.

"We do feel that companies are paying now for over-reaching themselves a few years back when the same policy would have paid out between ?100,000 to ?110,000, and it must be difficult for customers to accept that just as recently as 2000 their policy would have been worth twice as much."

Mr McPhail pointed out that some policies which now have 0% bonuses are not going to do much to warm the hearts of customers, but said that ultimately the figures were better than most.

"The bonus rates are still holding up quite well, and when other companies have made their announcements, Norwich Union customers may well have greater cause for comfort," he added.