Norwich Union cuts bonus payouts

Bonus payments have fallen despite a rebound in share prices

The UK's biggest life insurer, Norwich Union, has cut bonuses for some with-profits policyholders.

Payments on many of the policies have been reduced, despite a stock market recovery since early 2003.

Norwich Union said that with-profits funds were still being "significantly impacted" by the poor stock market performance between 2000 and 2002.

However, the insurer insisted that over the long term with-profit investors had enjoyed strong growth.

Market falls

With-profits policies are designed to "smooth" out the peaks and troughs of stock market volatility.

Norwich Union regular bonus rates Unitised with-profits Pensions: No change from 3.5% Stakeholder pensions: No change from 4% Life insurance: No change from 4.25% Policies taken out between 1998 and 2002: Bonus reduced from 2.5% to 2% Conventional with-profits Commercial Union: No change from 0% - 1% range CGNU: No change from 0 to 1% range Provident Mutual: No change at 0% Source: Norwich Union

Profits made in good years are kept in reserve to pay investors an annual bonus even when the stock market performs badly.

However, heavy stock market falls throughout 2001 and 2002 forced most firms to trim bonus rates on their policies.

Norwich Union, part of the Aviva group, has now cut bonuses for many of its 3.3 million policyholders in the past three years.

"The investment climate has improved but the stock market is only now approaching the levels of 1997," Mike Urmston, Norwich Union chief actuary, told BBC News.

Norwich Union final payouts Unitised with-profits Final bonuses increased in most cases Conventional with-profits Life and pension policies with a term of 10 and 15 years reduced from 2% to -8% Life and pension policies with a term of 20 and 25 years reduced by 6% to 10% Single premium pension policies with a term of 10 and 15 years reduced from 5% to -9% Single premium pension policies with a term of 20 and 25 years will be reduced by 5% to 10% Source: Norwich Union

"As a result, we have had to cut bonuses on some policies but cuts are less extensive than in previous years."

Mr Urmston said that the insurer had decided to cut rates on its highly-valuable, conventional with-profits policies, so the cut can be seen as representing part of the regular "smoothing" process.

It left many of its unitised policies unchanged.

The cuts on Norwich Union's conventional with-profits policies will mean a policyholder who had invested £50 a month into an endowment policy for the past 25 years would see a final maturity payout of £52,576.

This equated to an annual investment growth rate of 8.9%, the insurer said.