Article date: 17 January 2006
- Very strong performance from property and equity marketsenabled CGNU with-profit fund to achieve an overall return of17.7% before tax
- Regular bonus rates held with some increasing (announced on14.12.05) – following the increase in some regular bonusrates in July 2005
- Most final bonus rates increased
- Bonuses totalling £1.1 billion added during 2005 for around2.8 million with-profits policies
- Market value reductions (MVRs) reduced from 1.1.06 followingfour cuts in 2005. Money invested in 2001 no longer subject toMVRs
- Policy payouts continue to be competitive:
- Cash-in value for a £10,000 lump sum 10-year bond is £16,797,giving a return of 5.3% p.a., £3,871 above inflation
- A 25-year £50 a month mortgage endowment maturing in 2006 willpay £50,295 - 66% (£19,927) over the target amount of £30,368and gives a return of 8.6% p.a.
- A 20-year £200 a month pension maturing in 2006 will pay£110,387 – a return of 7.7% p.a.
Figures for investment and policy returns relate to the CGNUwith-profit fund only. Returns quoted assume the policies mature on1 January 2006. Endowment example is for a 29 year old male at theoutset of the policy.
John Lister, chief actuary, Norwich Union Life, said:
"Following the increases in regular bonus rates on some productsannounced in 2005, an excellent investment return and a strong fundhave enabled us to increase most final bonus rates and deliver goodpolicyholder returns.
"The strength of the fund allows us to have a high proportion ofpolicyholders' money invested in shares and property, which hasclearly benefited policyholders in providing the near 18% return.It also allows us to offer our customers valuable guarantees."
Press office contacts:
Norwich Union Lifepress office: 01904 452791 / 452617 / 452828
Out of hours:
James Evans: 07800 699525
Cheryl Cox: 07800 695275
David Gwyer: 07800 699508
Rob Pell: 07800 699563
1) The economic and investment background affectingwith-profits policies
2) The investment returns on the with-profitfunds
3) How the with-profit funds invest policyholders'money
4) How returns on with-profits policies compare toother types of investments
5) Regular bonus rates for policyholders for2006
6) Payout values for policyholders for 2006
7) Changes to cash-in values for unitised policies(known as MVR rates)
8) Payout examples for conventional policies in2006
9) Mortgage endowments – facts andfigures
The UK economy has seen growth over the last year largely as aresult of strong merger and acquisition activity and buoyantcorporate earnings. Rising oil prices also gave a boost to the FTSEAll-Share index. Later in the year mortgage approvals and housesales began to rise and retail sales recovered from their lowpoint. The US economy, which acts as a barometer to the worldeconomy, has also demonstrated growth over the last year, supportedby the continuing strength of US consumer demand and the vibrant UShousing market.
UK equities showed strong growth in 2005 with medium-sizedcompanies delivering the best share price performance. Over theyear, general retailers struggled as fears of a spending slowdownon the high street proved to be correct. Pharmaceuticals did wellat the end of the year as institutional investors were concerned byrising inflationary pressures and slowing economic growth in theUK. The generally positive trend that has been in place for sometime in the commercial property market continued during 2005. Thisled to returns in these sectors of around 20%.
Given the strong performance of equity markets in 2005 we havelower return expectations for the next 12-18 months. We anticipatereturns of 5 to 10% for equities and property in 2006.
The chart below tracks the FTSE 100 index over the years 2000 to2005. It shows the substantial recovery from the low point in March2003 but also that it still remains 19% below the peak levelachieved at the end of 1999.
We have seen another year of positive returns on the CGNU andCULAC with-profit funds, with a return in 2005 of 17.7% before tax.The comparable returns in 2004 and 2003 were 11.6% and 12.1%respectively (all before tax). The return on the NULAP with-profitfund was 16% before tax, while the return on the Provident Mutual(PM) fund was 10.6% before tax. The PM figure reflects the higherproportion of assets invested in fixed interest investments. Forthose PM endowment policyholders who opted during 2005 to switchfuture investment returns to the CGNU with-profit fund, the returnwas 15.5% before tax.
The investment return has been passed on to our policyholdersthrough an increase in the underlying value of their policies(known as the asset share).
Investments of the CGNU with-profit fund at the end of2005
|Investment type||% at the end of 2005||% at the end of 2004||% at the end of 2003|
|UK fixed Interest/bonds||19.4||24||26.1|
The equity backing ratio (proportion in shares &property) increased from 67% at the start of 2005 to 72% at theend of the year. A significant EBR is important for long-termperformance. The equity backing ratio of the CULAC fund is 72%,the NULAP fund is 60% and the Provident Mutual fund is14.5%.
Investment bond – 10 years
|Original Investment||Value of investment after 10 years||% Return before inflation of 2.6%p.a||% p.a. real return|
|CGNU (Incl.GA) with-profit bond||£10,000||£16,797||5.3||2.7|
|CULAC with-profit bond||£10,000||£16,654||5.2||2.6|
|NULAP with-profit bond||£10,000||£16,869||5.4||2.8|
|NULAP balanced managed unit-linked fund||£10,000||£16,681||5.3||2.7|
|NULAP Equity unit-linked fund||£10,000||£17,920||6.0||3.4|
|Bank/building society savings account||£10,000||£13,917||3.4||0.8|
Examples based on a £10,000 single investment made on 1January 1996. The original investment plus Retail Price Index(RPI) would be £12,926. Returns are quoted net of basic ratetax.
Short term returns: Short term returnscontinue to improve. For example, a year ago, a with-profitbond (taken out on 1 January 2000) after five years returned£10,173, just above the original investment. A year on, theprogress in market recovery means that a bond (taken out on 1January 2001) returns £11,767 showing a real return overinflation of 1% p.a. If invested in a building society over thefive years from 1 January 2001 the value would have been£11,290, just in line with inflation.
Figures above are an illustration of the return over thelast 5 years. However, it should be remembered thatwith-profits is a long-term investment.
The bank/building society savings account illustration iscompiled from an aggregate of 19 bank and building societyrates, chosen to represent the industry as a whole, for adeposit of £2,500 to £25,000. Source: Micropal S&P. Whencomparing different types of investment and savings productsyou should bear in mind that access, tax treatment and risk toyour money may differ.
Pension – 20 years
|Original Investment||Value of investment after 20 years||% Return before inflation of 3.0%p.a||% p.a. real return|
|CGNU (incl. GA) with- profit pension||£200 a month||£110,387||7.7||4.7|
|CULAC with-profit pension||£200 a month||£116,128||8.1||5.1|
|NULAP with-profit pension||£200 a month||£108,298||7.5||4.5|
|Provident Mutual with-profit pension>||£200 a month||£89,272||5.8||2.8|
|NULAP UK balanced managed unit-linked fund||£200 a month||£103,022||7.1||4.1|
|NULAP UK Equity unit-linked fund||£200 a month||£107,959||7.5||4.5|
Examples based on a £200 per month investment started on 1January 1986.
In most cases the effective with-profits policy return ishigher than shown above as policyholders have the right to avaluable guaranteed annuity rate.
Unitised policies: Money is invested in aunitised with-profit fund, and units are allocated topolicyholders. In a unit-linked fund, units go up and down withmarket movements, in a unitised with-profit fund, they increasesteadily at a rate, determined annually, (the annual bonus rate).At the time of a claim, a final bonus may be added to reflectadditional smoothed returns over the annual bonus rate.
- Regular bonus rates have been held, with some increased
- Explicit charged unitised policies: Life/investment policies4.25%. Pensions 4.5% (increased from 4.0%), stakeholder pensions4.0% (increased from 3.5%). For Norwich Union InternationalLimited (NUIL) Offshore bonds 5.0% sterling or 4.75% (euro/$)unaltered. (These rates were announced on 14.12.05.)
Explicit charged policies are policies where the bonus rate isexpressed as a gross rate before the deduction of the 1% annualfund management charge.
- Implicit charged life/investment policies: All NULAP policiesunaltered at 2%. All CULAC policies no change at 3.25% (increasedfrom 2.5 % from July 2005). CGNU policies taken out before October1998, no change at 3.25% (increased from 2.5% from July 2005).CGNU policies taken out from October 1998 unaltered at 2%.
- Implicit charged pensions: NULAP policies 3% unaltered.CGNU/CULAC policies remain at 3.5% (increased from 3% July 2005).In some instances a 4% minimum bonus rate applies.
Implicit charged products mean that the annual management chargefor the policy is deducted from the investment return before theannual bonus rate is set.
The different levels of bonus rates for the implicit andexplicit (net of charges) policies reflects the level of guaranteesbuilt up in the different ranges of policies and the differinginvestment periods during which money has been invested.
Conventional policies: Policies have an initialamount that is guaranteed to be payable to the policyholder onmaturity. Each year this guaranteed amount can be increased by anamount called a regular bonus (formerly known as a reversionarybonus). At maturity, an additional amount, called a final bonus(formerly known as a terminal bonus) may also be added, such theamount paid out reflects what the policyholder's investment isactually worth, subject to smoothing.
Life, investment and pension policies for CGNU,CULAC, NULAP andPM policies, no changes to regular bonus rates. Regular bonus rateson the main policies range from 0% to 2%. These bonus rates reflectthe level of valuable guarantees in the funds.
The above bonus rates on unitised and conventional policies areapplicable until further notice.
Unitised policies: All policy values haveincreased during 2005. Final bonus rates have also been increasedexcept where an MVR is applied where the final bonus rate is0%.
Examples of how policy values have increased during 2005:
15 year bond
|Cash-in value 01/01/05||Cash-in value 01/01/06||Increase in value during 2005||Increase %|
|CGNU (incl. GA)||£26,415||£29,552||£3,137||12|
The example above is based on a £10,000 single contributionon 1 January 1991, for a male aged under 75 at the outset andshows the change in policy value during 2005.
15 year pension
|*Unit value 01/01/05||Maturity value 01/01/06||Increase in value during 2005||**Increase %|
|CGNU (incl. GA)||£51,694||£60,334||£8,640||17|
* If transferred an MVR may apply
Conventional policies: Life, investment andpension policies – for all Norwich Union companies: Nearlyall policy values have increased during 2005. Final bonus rates arebeing increased except where the level of guarantees mean no finalbonus has yet been earned.
In general, shorter-term policies show increases or smalldecreases compared to equivalent policies maturing a year ago,while those with a term of 20 and 25 years will generally belower.
Payouts on longer-term endowments for example are likely tocontinue to reduce. This is because our expectation of futureinvestment returns has reduced compared to those historicallyearned. Payouts reflect the investment earnings during the period apolicy is actually held and invested together with the level ofsmoothing applied at the maturity date. As policies are held overdifferent investment periods then payouts will differ. This is whypayouts on a 25 year policy for example are likely to continue toreduce even in years with positive investment returns.
What is important to a policyholder is the value added on theirpolicy rather than a comparison with the benefit they would havegot if they had invested over a different period.
For example, a CGNU 25 year savings endowment policy has seen a9% reduction in payout compared to a year ago. However, if youcompare the surrender value of this policy a year ago with thematurity value now, there has been a 12% increase in policy valueover the year, after taking account of the further premiumspaid.
Market value reductions (MVRs) apply when the quoted value ofunits is above the policyholder's 'fair share' of the fund –known as the asset share. Asset shares have increased during theyear as a result of positive investment earnings. To reflect this,MVRs have been reduced and in the case of 2001 monies removedcompletely. The level of the reduction is not the same in eachfund, due to the different investment earnings achieved and thelevel of smoothing applied. Average MVR rates for money invested ina specific year are;
|Year money invested||New MVR at 01/01/06 %||MVR at 06/10/05 %||MVR at Jan 2005 %|
The higher MVR rates reflect money invested when the stockmarket was around its peak.
John Lister, chief actuary, said: "We have consistently reviewedand managed down the level of MVRs throughout 2005 to reflect thecontinuing improvement in the stock market. Our policy is to removeMVRs as soon as market conditions allow."
Pension – 20 years
|Company||Maturity value 01/01/06||Including a final bonus of||Return p.a. before deducting inflation of3.0% p.a.||% p.a. real return|
|CGNU (incl GA)||£110,387||£1,295||7.7||4.7|
The above example is based on a male, investing £200 a monthfor 20 years, from 1 January 1986, with the policy maturing atage 65, with a return of fund death benefit. A CGNU £200 amonth with-profit pension policy taken out 01.01.85, maturing1.1.05 produced a payout of £113,392 giving a reduction of 3%at 1.1.06.
In most cases the effective with-profits policy return ishigher than shown above as policy holders have the right to avaluable guaranteed annuity rate.
Savings endowment policy – 25 years
|Company||Maturity value 01/01/06||Including a final bonus of||Return before deducting inflation of3.4%||% p.a. real return|
|CGNU (incl GA)||£51,927||£12,588||8.8%||5.4|
The above example is based on a male aged 29 investing £50 amonth for 25 years with the policy starting on 1 January 1981,with a policy maturing at age 65, with a return of fund deathbenefit. A CGNU £50 a month with-profit savings endowmentpolicy maturing at 1.1.05 produced a payout of £57,279 giving areduction of 9% at 1.1.06.
Savings endowment policy – 15 years
|Company||Maturity value 01/01/06||Including a final bonus of||Return before deducting inflation of2.6%||% p.a. real return|
|CGNU (incl GA)||£12,594||£0||4.3%||1.7|
The above example is based on a male aged 29 investing £50 amonth for 15 years with the policy starting on 1 January 1991.A CGNU £50 a month withprofit savings endowment policy maturing01/01/05 produced a payout of £13,214, giving a reduction of 5%at 1/01/06.
Mortgage endowment policy – 25 years
|Company||Original target value of policy||Maturing policy value 01/01/06||Excess amount over target||Return before inflation of 3.4%||% p.a. real return|
|CGNU (incl GA)||£30,368||£50,295||£19,927||8.6%||5.2|
The above example is based on a male aged 29 investing £50 amonth for 25 years with the policy starting on 1 January 1981.A CGNU 25 year £50 a month with-profits mortgage endowmentpolicy maturing 1.1.05 delivered a payout of £52,576 areduction of 4% at 1.1.06.
Mortgage endowment policy – 15 years
|Company||Original target value of policy||Maturing policy value 01/01/06||*Shortfall over target||Return before inflation of 2.6%||% p.a. real return|
|CGNU (incl GA)||£14,909||£12,424||£2,485||4.2%||1.6|
*Shortfall before the impact of any "6% promise"payment.
Mortgage endowment shortfallstatus. Statistics for the latest full mailing undertakenby Norwich Union in 2005 show the following status: 7 % of policieson green, 21% of policies on amber and red 72%.
For CGNU and CULAC where we show 4%, 6% and 8% projection rates:green is less than 6% required growth, amber is 6-8% and red morethan 8%. For NULAP where we show 4%, 5% and 6% projection rates:green is less than 5% required growth, red is more than 5%. For PMwhere we show 3.5%, 4% and 4.5%; green is less than 4% requiredgrowth, red is more than 4%.
Mortgage endowment promise: Norwich Unionlaunched its mortgage endowment promise in 2000 to assistpolicyholders who, at the time of the announcement, were in aposition of shortfall on their mortgage endowment. This promise wasdesigned to help people make up the shortfall on a mortgageendowment policy when it matured and is needed to pay off themortgage. The mortgage promise was conditional on the companyearning a sufficient investment return on its free reserves.
The company has already committed around £1 billion of capitalfor future endowment shortfall assistance – underlining thestrength of our with-profit funds. Norwich Union believes that itsmortgage endowment promise remains fully viable under the currentand improving market conditions and as a result is not underreview. If market conditions were to change significantly in thefuture then the promise may be reviewed. Norwich Union hascommitted to its customers that if it was to review the promise,that it will give policyholders at least three years notice of anyproposed changes.
Time-barring of mortgage endowment complaints:Norwich Union began writing to customers in April 2005 confirmingthat a time bar would be applied for mortgage endowment complaints.The first date that a mortgage endowment complaint will become timebarred will be April 2006. Norwich Union is giving at least 12months notice of its intention to time bar complaints –double the six months notice required by the FSA. In addition tothe 12 month notice we will be reminding our customers of the dateof the time bar, three months before the effective date.
Mortgage endowment letters: Norwich Union hasradically redesigned its mortgage endowment letter to make it evenmore clear to customers where they have a shortfall and that theymust take action. The letter also very clearly states if a time baris applicable on their mortgage endowment policy. The new letterwill start being issued in 2006.
Notes to Editors
Norwich Union has approximately 2.8 million with-profitcustomers of which 1.1 million are endowments, 1.1 million arepensions and 0.6 million are investment bonds. At the end of June2005, the total of Norwich Union's with-profit funds wasapproximately £63 billion. (CGNU £16 billion, CULAC £16 billion,NULAP £28 billion, PM £3 billion), up from £57 billion a yearbefore.
Further examples of payouts for conventional and unitisedpolicies over different terms are available on request.
Important notes: Future bonus rates are notguaranteed and may vary, as they depend on profits yet to beearned. Past performance is not a guide to the future. The value ofinvestment linked funds can go down as well as up and is notguaranteed. The illustrative maturity amounts include periods ofhigh inflation and high investment returns. We may apply a marketvalue reduction on encashments (except on some maturities or death)which will reduce what you get back from the unitised with-profitfund. Past performance is based on the charging structuresapplicable to the products at the time the policies were effected.Different charging structures apply to the current products. Fullwritten terms and conditions of Norwich Union products areavailable on request.
Norwich Union is authorised and regulated by the FinancialServices Authority and advises only on its own products.
Norwich Union is the UK's largest insurer. It is a leadingprovider of life, pensions and investment products and one of theleading IFA providers. IFAs provide around 75% of the company'slong-term savings business. Norwich Union has strategic allianceswith building societies and other leading UK brand names includingThe Royal Bank of Scotland Group and Cooperative Insurance Society.Norwich Union's news releases and a selection of images areavailable from Aviva's internet press centre at www.aviva.com/media