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
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own