CGNU slashes pay-outs on policies by 10 per cent

CGNU yesterday gave further evidence that Britain's with-profits endowment customers and pensioners are to suffer this year when it announced average cuts of 10 per cent on pay-outs on some policies.

Britain's biggest insurer said it was slashing pay-outs on policies maturing this year by about 10 per cent in response to the adverse market conditions of the past two years, which saw the FTSE 100 fall by 24 per cent.

CGNU, which operates under the Norwich Union brand in the UK, admitted the cuts would leave some of its 1.4 million mortgage endowment policyholders in danger of not having enough money in their policies to pay off their home loans.

Mike Urmston, CGNU's chief actuary, said: "We are going to see some shortfalls because, if you are earning minus 10 per cent you cannot defy gravity."

The news may come as a shock to some CGNU endowment policyholders, who were told in January 2000 that if the group's investment return did not fall below 6 per cent a year their policies would definitely pay off their mortgages. CGNU did better than the market in the past two years but still returned minus 1.1 per cent in 2000 and minus 9.6 per cent last year.

The company will still pay annual bonuses to with-profits customers, but they too have been reduced. Most with-profit pension policies will come down from 6.25 to 5.25 per cent and savings policies will fall from 5.25 to 4.25 per cent.

The move is part of a trend in the industry, which is using the current bonus season to tell investors they will receive less this year. Last week, Scottish Widows announced cuts of about 12 per cent in the value of its maturing 25-year endowment policies.

But most with-profits providers are still paying bonuses because of the "smoothing" element in the policy. This means the company holds back some of the investment return in good years in order to make up in part for bad years.

For Norwich Union policyholders, payouts on a 25-year endowment policy will fall from £81,718 last year to £73,640 in 2002, assuming premiums of £50 a month from a man aged 30 next birthday.