Norwich Union has cut bonus payouts for with profits policy holders. The cuts of up to 10 percent in final bonus rates will affect a total of two million policies and are effective as of September 1.  Norwich Union said that regular bonus rates would be unchanged and Market Value Reductions (MVRs) are not being introduced.

Final payouts for with-profits customers whose policies mature this year will be affected by the cuts.  Unitised policies will be cut by approximately 7.5 percent, while conventional policies will be cut by an average of 5 percent. Some will be cut by as much as 10 percent.  Those affected could include with-profits pension, endowment, savings scheme or bond holders.  Chief actuary at Norwich Union,  John Lister, blamed the cuts on big falls in the value of equity markets, commercial property and corporate bonds this year and the need defend the fund from withdrawals. “We need to ensure that those policyholders who leave the fund do not take more than their fair share at the expense of those customers who remain in the fund.” Its central with-profits fund, the CGNU fund,  achieved a return of minus 7.3 percent in the fist six months of this year.  By comparison the return for 2007 was 5.4 percent.  Norwich union also revealed that, despite bonus cuts,  payouts exceed the value of underlying asset shares, demonstrating the value of smoothing.  However this may be a double edged swords since it could benefit those with policies maturing this year at the expense of those who remain invested in the fund, even though the bonus cuts were intended to address this issue.

Norwich Union gave the following examples of mortgage and saving endowment payouts. They are based on a male, aged 29, investing £50 per month for 25 years with the policy starting on 1 September 1983. The figures for 2008 include the special bonus payments and, for comparison, the figures in brackets exclude the special bonus for CGNU and CULAC funds only.

* investments not switched to CGNU mid 2005

* investments not switched to CGNU mid 2005

Despite falls in many asset values Norwich Union is confident that with-profits investments have good prospects for long-term growth.  It confirmed that around 700,000 CGNU and CULAC fund customers will be eligible for a re-attribution payment in the near future in return for giving up any claim on future payouts from the inherited estate.

A reduction in Equity Backing Ratio (EBR) from 71 percent to 60 percent for CGNU and CULAC funds was also reported.  EBR for NULAP and Provident Mutual funds was unchanged,  presumably because they have a  higher percentage of fixed interest assets.  As Norwich Union confirms,  “A significant EBR is important for long term performance” and some may wonder if this change will benefit those with polices maturing sooner at the expense of customers with policies maturing later.  While recent declines in some asset values are obviously challenging,  it’s popular to assume that increases in EBR should improve long term investment performance as these assets have historically shown higher returns than fixed interest.  The investment allocation of CGNU and CULAC funds is given as follows:

Tuesday, September 9th, 2008 You can leave a response, or trackback from your own site.