Continued stock market decline lowers with-profits returns

Article date: 23 July 2002

As a result of continuing poor stock market returns, NorwichUnion is reducing final bonus rates on both unitised andconventional with-profits policies. This will result in payoutsbeing reduced by around 5 per cent. The changes take effect from 1August.

Norwich Union is also reducing the regular bonus rates onunitised with-profits policies by 0.5 per cent, effective from 1August. Similar changes are under consideration for conventionalwith-profits business at the year-end.

The changes to bonus rates have been made due to the continuingadverse conditions in the UK stock market which has fallen by asmuch as 25 per cent this year. This decline in 2002 follows poorstock market performance in 2001 (down 16 per cent) and 2000 (down10 per cent). The impact on the with-profits fund has been to seean overall return, to 18 July this year, of minus 8.3 per cent.This compares to an assumption, when setting bonuses at the startof the year, that the fund would earn a positive return of 7.25 percent for the full year.

However, the financial strength of the with-profits fund hasenabled Norwich Union to smooth the performance of its with-profitspolicies resulting in a lower reduction in payout than realinvestment returns would dictate.

Customers still continue to enjoy good returns on theirinvestment at a time when we have the lowest interest rates andunderlying rate of inflation for decades. A 25 year with-profitsmortgage endowment has on average produced a return of 11.1 percent a year compared to inflation of 4.1 per cent over the sameperiod.

Commenting on the changes, chief actuary, Mike Urmston, said: "This year, we have been paying out, on average across allwith-profits products, 122 per cent of policy earnings. We are nowreducing the final bonus to bring payouts closer to our publishedguideline of no more than 110 per cent of policy earnings undernormal conditions.

"The change in regular bonus rates is part of the prudentmanagement of the with-profits fund. We are seeking to achieve thecorrect balance between the proportion of the overall return thatis paid in the form of bonuses guaranteed on maturity or retirement, and the non-guaranteed final bonus.

"Norwich Union remains committed to with-profits and believesthat it meets a real need for many consumers. At times of sucheconomic uncertainty and extreme volatility in the stock market,new and existing customers welcome more than ever access to pooledlong-term investments with smoothing of underlying returns."

Press Office contacts: 
  
James Evans08703 66 68 71 or 07790487105
Ian Beggs08703 66 68 71 or 07790487533
Louise Goffee08703 66 68 70 or 07810057362
  


Notes to editors

Norwich Union is the UK's largest insurer. It is the UK'slargest provider of life, pensions and investment products and oneof the leading IFA providers. IFAs provide around 75% of thecompany's long-term savings business. Norwich Union has strategicalliances with building societies and other leading UK brand namesincluding Tesco Personal Finance and The Royal Bank of ScotlandGroup.

A selection of images is available from the Aviva Newscast siteat www.newscast.co.uk

Norwich Union’s news releases are available on the Avivaplc website at www.aviva.com

For life & pension media enquiries call 08703 66 68 73
For all other media enquiries call 08703 66 68 68

Bonus Terms Explained

There are two types of with-profits policies: Unitisedand Conventional.

Unitised

Contributions buy units in the With-Profits Fund. The unit priceincreases as the annual bonus is added on a daily basis.

The payout for a unitised with profits policy is made up of twoelements: The value of units and final bonus.

Value of units: This is the value of the units held.

Final Bonus: At the date of claim the value of the units iscompared with the total earnings of the policy. Any balance is madeup by the declaration of a final bonus. Scales are expressed as apercentage of the unit value and vary according to the year themoney was invested. Different final bonus rates will apply to theunits bought with the different years’ contributions.

Conventional

Contributions secure a guaranteed benefit. Bonuses are added tothe guaranteed benefit annually and at the end of the policy termas detailed below.

The payout under a conventional with-profits policy is made upof three elements: the guaranteed benefit, regularbonus and final bonus.

Guaranteed benefit (also known as sum insured): This is theamount payable at the date of the claim (eg. maturity or earlierdeath). Bonuses are added to this amount over the term of thepolicy to make up the final payout.

Regular Bonus (also known as annual or reversionary bonus): Thisis the amount added to a with-profits policy each year. It is apayment on account towards the full share of policy earnings whichwill be payable at the date of claim. For most policies it isexpressed as one percentage applying to the guaranteed benefit anda further percentage applying to the bonus already added inprevious years.

Final bonus (also known as terminal or additional bonus): At thedate of claim the total of the guaranteed benefit and regularbonuses to date is compared with the total earnings of the policy.Any balance is made up through the declaration of a final bonus.Final bonus rates are expressed as a percentage of the guaranteedbenefit and will form a scale of rates that will vary according tothe year the policy was taken out.

Please note: The above is designed as an introduction to bonusterms. For details relating to specific policies, please refer tothe policy terms and conditions.

Impacts of Smoothing

The smoothing of payouts is still evident even aftertoday’s announcement as the following example shows.

£10,000 Bond started on 1 Jan 1992:

 1 Jan 20011 Jan 20021 Aug 2002
With Profits£24,796£23,198 (-3%)£ 22,509 (- 3 %)
Managed Funds£22,376£20,364 (-9%)£ 17,910* (-12%)
* based on value at 19 July 2002


Unitised Bonus - Payout Tables And Regular Bonus Rates

The following tables show changes to regular bonus rates andcomparative maturity payouts following the bonus declaration forthe three main companies that now form part of Norwich Union.

  • Norwich Union writes new with-profits business in the CGNULife with-profits fund. The CGNU Life fund was previously the CGUfund. It has been chosen because of its stronger position inrelation to equity backing ratio and superior pay out record,particularly for long term contracts
  • To maintain financial strength, investment flexibility and tofacilitate the eventual merger of the with-profits funds, aproportion of the with-profits business will be reassured to otherwith profit funds in the CGNU Group, namely the Commercial UnionLife (CU) and the NU Life (NUL&P) funds
  • Investment objectives and risk controls for the 3 with-profitfunds are the same as for CGNU Life.

Regular Bonus (all companies) for the main products for2002

 1 August1 Jan – 31 July
Life Business (including investmentbonds)3.75%4.25%
Stakeholder Pensions4.25%4.75%
Other Pensions4.75%5.25%


Payouts

CGU (including General Accident)

With-profits bond

 Maturing1.8.02Maturing1.1.02Average rate
of Inflation
to July 2002
Effected 10 years ago:   
Unit value£18,766£19,329 
Final bonus£3,190£3,869 
Total payout£21,956£23,198 
Yield8.2%8.8%2.4%

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Unit value£32,340£32,657 
Final bonus£1,404£2,443 
Total payout£33,744£35,100 
Yield6.6%7.4%2.4%


10 year personal pension

Commercial Union

With-profits bond

 Maturing1.8.02Maturing1.1.02Average rate
of Inflation
to July 2002
Effected 10 years ago:   
Unit valuenot applicable yetnot applicable yet 
Final bonus   
Total payout   
Yield   

10 year personal pension

 Maturing1.8.02Maturing1.1.00Averagerate
of Inflation
to July 2002
Unit value£31,601£31,790 
Final bonus£1,957£2,992 
Total payout£33,558£34,782 
Yield6.5%7.2%2.4%

Norwich Union Life & Pensions(NUL&P)

With-profits bond

 Maturing1.8.02Maturing1.1.02Average rate
of Inflation
to July 2002
Effected 10 years ago:   
Unit value£17,221£17,629 
Final bonus£3,444£4,055 
Total payout£20,665£21,684 
Yield7.5%8.0%2.4%

10 year personal pension

 Maturing1.8.02Maturing1.1.00Averagerate
of Inflation
to July 2002
Unit value£31,192£31,466 
Final bonus£2,493£3,100 
Total payout£33,724£34,566 
Yield6.6%7.1%2.4%

The bond examples above are based on a £10,000 singlecontribution made by a man under age 75 at outset. The Pensionexample is as issued to a male for a monthly premium of £200,maturing at age 65, with a return of fund death benefit. Otherexamples are available on request.

Conventional Bonuses - Payout Tables

CGU (including General Accident)

10 year endowment

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Guaranteed benefit£5,322£5,322 
Regular bonus£2,139£2,276 
Final bonus£448£456 
Total payout£7,909£8,054 
Yield5.4%5.7%2.4%

25 year endowment

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Guaranteed benefit£14,241£14,241 
Regular bonus£28,950£28,926 
Final bonus£42,327£46,620 
Total payout£85,518£89,787 
Yield12.0%12.3%4.1%

Commercial Union

10 year endowment

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Guaranteed benefit£5,361£5,361 
Regular bonus£1,979£2,160 
Final bonus£587£602 
Total payout£7,927£8,123 
Yield5.4%5.9%2.4%

25 year endownment

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Guaranteed benefit£13,200£13,253 
Regular bonus£42,207£43,980 
Final bonus£26,595£29,761 
Total payout£82,002£86,994 
Yield11.8%12.1%4.1%

Norwich Union Life & Pensions(NUL&P)

10 year endowment

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Guaranteed benefit£5,533£5,533 
Regular bonus£1,472£1,472 
Final bonus£1,245£1,300 
Total payout£8,250£8,305 
Yield6.2%6.3%2.4%

25 year endowment

 Maturing1.8.02Maturing1.1.02Averagerate
of Inflation
to July 2002
Guaranteed benefit£14,559£14,559 
Regular bonus£32,292£32,292 
Final bonus£23,222£26,789 
Total payout£70,073£73,640 
Yield10.8%11.1%4.1%

The endowment policy examples above are based on a male aged 30next birthday, when the policy was started, for a monthly premiumof £50.

Important notes:

Future bonus rates are not guaranteed and may vary, as theydepend on profits yet to be earned. Past performance is not a guideto the future. The value of investment linked funds can go down aswell as up and is not guaranteed. The illustrative maturity amountsinclude periods of high inflation and high investment returns. Wemay apply a market adjustment factor on encashments (except onmaturity or death) which will reduce what you get back from theunitised with-profits fund. Past performance is based on thecharging structures applicable to the products at the time thepolicies were effected. Different charging structures apply to thecurrent products. Full written terms and conditions of NorwichUnion products are available on request. Norwich Union is regulatedby the Financial Services Authority and only advises on its ownproducts. All charging structures are applied to the product at thetime the policy was effected.

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