Life assurance bonuses cut despite rising markets

Millions of savers who own with-profits savings plans will suffer a sharp cut in annual bonuses this year - even though investments grew in 1997 by more than 15 per cent. As Andrew Verity reports, actuaries foresee even smaller payouts in years to come.

GA Life, one of the country's top ten life insurers, yesterday announced it was reducing its annual bonus to with-profits savers by 0.5 per cent - despite growth in savers' funds of more than 20 per cent.

The bonus declarations will dismay millions of savers who had hoped to cash in on a bonanza year for the equity markets. In 1997, GA's with-profits fund saw investment growth of 20 per cent. Yet pension savers with GA will only be promised a bonus of 8 per cent for the year.

Competitors of GA - which can keep up bonuses because of its giant reserves - are likely to declare even lower bonuses. With-profits pension savers with Norwich Union will get a return this year of just 6.75 per cent - compared to 7.5 per cent last year.

GA said it could no longer pay such high levels of annual bonus when markets were all anticipating much lower growth in future.

Company actuaries, who set the annual bonuses paid to policyholders, measure the amount they can guarantee against the yield on long-term gilts.

Because these plunged last year to a low of 6.25 per cent, not seen since the 1970s, actuaries no longer feel confident enough to guarantee high annual bonuses every year. Instead, the actuaries are promising more in maturity payouts - which are not guaranteed.

According to the Institute of Actuaries, life offices have only been able to guarantee high annual bonuses because of unusually high investment growth right back to 1974, when stockmarkets hit their nadir in the midst of the oil price shock.

The low yield on gilts reflects a belief, shared by actuaries, that as long as inflation stays low, investment returns from stocks and shares can be expected to do the same.

Nick Dumbreck, a leading figure at the Institute of Actuaries, said:

"I think it is absolutely right that companies should be reducing bonuses at this time. It doesn't mean savers are getting less overall - they are just getting less now."

He added that lower inflation would mean their savings would be worth more in the long term."

Peter Nowell, chairman of the Institute's life board, added: "In the past we had some very high investments returns - and some very high inflation. During the 1990s, inflation has become lower so the target for investment growth has become lower as well.

"My concern would be if life offices tried to keep their annual bonuses right up, which might have an impact on their financial strength. Annual bonuses ought to be below gilt yields."

Savers with 25-year policies, who have benefited from the long bull-run, can expect unprecedented payouts this year. A man who started paying pounds 50 a month to a 25-year GA Life policy, maturing now, would receive a payout of pounds 120,784 this year, up from pounds 114,554 if he had started a year earlier. This is the same as an interest rate of 14.2 per cent a year.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future