Norwich Union with-profits bonus announcement

Article date: 14 January 2003

Norwich Union today announces new regular bonus rates andpayouts for with-profits policies for 2003. The bonus rates andpayouts are lower than 2002 as a direct result of the continuingpoor stock market environment.

However, even with reduced payouts, maturing policies are stillproviding competitive real returns, with a 25 year endowmentreturning 10.8% a year after tax (a real return of 6.8% ayear)*.

In 2002 alone, the UK stock market declined by 24%. This,combined with the falls in the previous two years, has resulted inthe worst bear market for more than a quarter of a century.

However, during 2002, Norwich Union’s with-profit fundshowed a slightly improved performance over 2001 (minus 8.6% in2002 compared to minus 9.5% in 2001). This was due to the impact ofhigher returns from property and fixed interest.

* This example is based on annualised returns for a 25 yearendowment in the CGNU Life with-profit fund.

Norwich Union Chief Actuary, Mike Urmston, said: “Thesenew bonus rates and payouts demonstrate how with-profits policiescontinue to provide real returns – despite poor investmentconditions. In 2002 alone Norwich Union added around £1.5 billionin bonuses to with-profits policies.

“We have to ensure we maintain the right balance betweenwhat we pay out now to customers with maturing policies and theguaranteed values that are added to policies through annual bonusadditions in the future. Prudent action has to be taken in thisdifficult investment climate. The changes we are making aredesigned to protect the interests of all policyholders and ensurecontinued financial stability of the fund.”

Annual bonus rates and payouts for unitised with-profitspolicies:

  • On life and investment products the bonus rate will be reducedfrom 3.75% to 3.25%.
  • For stakeholder pensions the bonus rate will be reduced from4.25% to 3.50%. On other currently marketed pension products thebonus rate will be reduced from 4.75% to 4.00%.
  • For offshore bonds the bonus rate will reduce from 4.75% to4.0%.
  • Payouts will be reduced (by reducing the amount of the finalbonus paid) on unitised policies by between 1% and 15%.

Annual bonus rates and payouts on conventionalwith-profits policies:

  • A table of new bonus rates for conventional policies is shownin Notes To Editors.
  • On life and investment policies, payouts will be reduced bybetween 9% and 15%.
  • On pension policies, payouts will be reduced by between 5% and20%.

Mike Urmston added: “Looking to the future, we need to seea sustained improvement in the investment climate to enable currentbonus levels and payouts to be maintained. With the continuingstock market volatility we expect to review bonus rates moreregularly in the future. This will enable us to respond better tochanging market conditions and ensure continued fairness andtransparency in the payments we make to all policyholders in thefund.

“We firmly believe that with-profits is still a key partof the investment mix for many customers. The fundamentals ofwith-profits remain the same and still continue to deliver thebenefit of investing in a managed fund with smoothing of returns.New investors can be assured that they will benefit from any futureinvestment growth without feeling the effects of the poor equityreturns we have experienced over the last three years.”

Ends

For further information please contact the Norwich Union Lifepress office on 08703 666878, 08703 666871 or 08703 666870. For outof hours calls please contact: James Evans on 07790 487105, IanBeggs on 07790 487533 or Louise Goffee on 07810 057362.

Notes To Editors

  • Unitised Regular Bonus rates for the main currentproducts
  Jan 2003% Aug 2002%
     
Life business (including investment bonds) 3.25 3.75
Stakeholder pensions 3.5 4.25
Other explicit charge pensions 4.0 4.75
Offshore bond 4.0 4.75*

* Offshore Bond was available from September 2002.

  • Conventional Regular Bonus rates for the mainproducts
 Bonus on sum assured / Attachingbonus
  
Life January 2003% January 2002%
     
Commercial Union 0.5 / 1.5 1.0 / 2.75
CGNU (General Accident) 1.0 / 2.0 1.5 / 3.0
Norwich Union L&P 0.5 / 1.0 1.25 / 2.25
     
Pensions January 2003% January 2002%
Commercial Union 0.5 / 1.5 1.0 / 2.75
CGNU (General Accident) 1.0 / 1.5 2.0 / 2.50
Norwich Union L&P** 0 / 0 0.25 / 0.75

** No regular bonus has been declared in this series for2003 as the product has valuable guarantees from the originalguaranteed benefit and from regular bonuses already added.

Norwich Union writes new with-profits business in the CGNU Lifewith-profit fund. The CGNU Life fund was previously the CGU fund.It has been chosen because of its stronger position in relation toequity backing ratio and superior pay out record, particularly forlong term contracts.

To maintain financial strength, investment flexibility and tofacilitate the eventual merger of the with-profit 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 threewith-profit funds are the same.

  • CGNU Life with-profit fund performance

In 2002, the with-profit fund return was minus 8.6 %. The returnon the fund in 2001 was minus 9.5% and in 2000 minus 1.1%.

  • CGNU Life With-profit fund investmentmix

Estimated investment mix of the CGNU with-profit fund at the endof 2002

Investment type % of fund at the end of2002 end of2001
     
UK Shares 32 48
International shares 9 14
Property 15 11
UK Fixed Interest 17 13
Corporate Bonds 17 9
International Bonds 5 3
Cash 5 2

 

At the start of 2002 the equity backing ratio (EBR) was 73% (ofwhich shares were 62% and property 11%). During the year the EBRfell to 56%. Of this fall of 17%, 12% was a direct result ofrelative movement in asset values and 5% because of movement out ofshares into fixed interest.

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 1993:

  1 Jan 2002 1 Aug 2002 1 Jan 2003
       
With Profits £20,171 £19,768 £ 18,972 (- 6 %)
Managed Fund £17,793 £15,357 £ 15,038 (-15%)

 

This example is based on a GA Bond.

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 strategic alliances with building societiesand other leading UK brand names including Tesco Personal Financeand The Royal Bank of Scotland Group.

Norwich Union's news releases are available on the Aviva plcwebsite at www.aviva.com

A selection of images is available from the Norwich UnionNewscast site at www.newscast.co.uk

Life and pension media enquiries call 08703 66 68 73
For all other media enquiries call 08703 66 68 68

Member of the Aviva group

Appendix

BONUS TERMS EXPLAINED

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

UNITISED

Contributions buy units in the with-profit 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 unitsis compared with the total earnings of the policy. Any balance ismade up by the declaration of a final bonus. Scales are expressedas a percentage of the unit value and vary according to the yearthe money was invested. Different final bonus rates will apply tothe units 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, regular bonus andfinal bonus.

Guaranteed benefit (also known as sum insured): This isthe amount payable at the date of the claim (eg. maturity orearlier death). Bonuses are added to this amount over the term ofthe policy.

Regular bonus (also known as annual or reversionarybonus): This is the amount added to a with-profits policy eachyear. It is a payment on account towards the full share of policyearnings which will be payable at the date of claim. For mostpolicies it is expressed as one percentage applying to theguaranteed benefit and a further percentage applying to the bonusalready added in previous years.

Final bonus (also known as terminal or additional bonus):At the date of claim the total of the guaranteed benefit andregular bonuses to date is compared with the total earnings of thepolicy. Any balance is made up through the declaration of a finalbonus. Final bonus rates are expressed as a percentage of theguaranteed benefit and will form a scale of rates that will varyaccording to the year the policy was taken out.

PAYOUT TABLES

The following tables show comparative maturity payouts followingthe bonus declaration for the three main companies that now formpart of Norwich Union.

Unitised Payouts

The bond examples below 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.

CGNU (including General Accident)

With-profits bond

 Cashed in
1.8.02
Cashed in
1.1.03
Average rate
of Inflation to
December 2002
Effected 10years ago:   
Unit value£18,766£18,242 
Final bonus£3,190£730 
Total payout£21,956£18,972 
Yield8.2%6.6%2.5%

 

10 year personal pension

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Unit value£32,340£31,612 
Final bonus£1,404£0 
Total payout£33,744£31,612 
Yield6.6%5.4%2.4%

 

Commercial Union

With-profits bond

 Cashed in
1.8.02
Cashed in
1.1.03
Average rate
of Inflation to
December 2002
Effected 10 years ago:   
Unit value£18,114£17,620 
Final bonus£2,898£881 
Total payout£21,012£18,501 
Yield7.7%5.9%2.5%

 

10 year personal pension

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Unit value£31,601£31,331 
Final bonus£1,957£0 
Total payout£33,558£31,331 
Yield6.5%5.2%2.4%

 

Norwich Union Life & Pensions (NUL&P)

With-profits bond

 Cashed in
1.8.02
Cashed in
1.1.03
Average rate
of Inflation to
December 2002
Effected 10 years ago:   
Unit value£17,221£16,902 
Final bonus£3,444£845 
Total payout£20,665£17,747 
Yield7.5%5.9%2.5%

 

10 year personal pension

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Unit value£31,192£30,709 
Final bonus£2,532£336 
Total payout£33,724£31,044 
Yield6.6%5.0%2.4%

 

Conventional Payouts

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

CGNU (including General Accident)

10 year endowment

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Guaranteed benefit£5,322£5,322 
Regular bonus£2,139£1,990 
Final bonus£448£0 
Total payout£7,909£7,312 
Yield5.4%3.9%2.4%

 

25 year endowment

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Guaranteed benefit£14,241£14,431 
Regular bonus£28,950£27,500 
Final bonus£42,327£28,094 
Total payout£85,518£70,025 
Yield12.0%10.8%4.0%

 

Commercial Union

10 year endowment

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Guaranteed benefit£5,361£5,361 
Regular bonus£1,979£1,796 
Final bonus£587£0 
Total payout£7,927£7,157 
Yield5.4%3.5%2.4%

 

25 year endowment

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Guaranteed benefit£13,200£13,200 
Regular bonus£42,207£40,183 
Final bonus£26,595£16,549 
Total payout£82,002£69,932 
Yield11.8%10.8%4.0%

 

Norwich Union Life & Pensions (NUL&P)

10 year endowment

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Guaranteed benefit£5,533£5,533 
Regular bonus£1,472£1,278 
Final bonus£1,245£249 
Total payout£8,250£7,060 
Yield6.2%3.2%2.4%

 

25 year endowment

 Maturing
1.8.02
Maturing
1.1.03
Average rate
of Inflation to
December 2002
Guaranteed benefit£14,559£14,500 
Regular bonus£32,292£28,755 
Final bonus£23,222£16,313 
Total payout£70,073£59,568 
Yield10.8%9.7%4.0%

 

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 value reduction on encashments (except onmaturity or death) which will reduce what you get back from theunitised with-profit 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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