Friends Provident yesterday cut bonuses to 1 million policyholders and warned that further cuts were still likely, adding to the gloom in the with-profits savings industry.
Axa, Scottish Widows, Norwich Union, Standard Life and Clerical Medical have all reduced their bonus rates in the past few weeks, despite enjoying a rise in the stock markets this year. The companies are blaming heavy investment losses sustained over the past three years, which are still taking their toll on the surplus cash available for bonuses.
The payout on a 25-year endowment from Friends Provident is now £51,283, down from £61,749 this time last year, as both annual bonuses and final bonuses that are added when policies mature have been reduced. Ben Gunn, managing director of Friends Provident's life and pensions business, said yesterday: "Although the with-profits fund has returned positive growth for the first time in three years, the cumulative return is still negative, at minus 6.5, reflecting the large fall in investments over this period."
Mr Gunn said payouts were still above the value of the underlying assets in the with-profits fund, and yesterday's cuts would bring them more in line. He warned, however, that bonuses will continue to fall: "Investment returns in the future will continue at lower levels than those experienced in the past two decades and bonus rates need to come down."
Insurers have also cut back their investments in equities, which means policyholders are now missing out on the bounce back in the markets. Friends Provident has a particularly low equity content, at around 33 per cent, compared to 50 per cent for other companies such as Norwich Union.
This meant the return on the investments in Friends Provident's with-profits fund was only 9.4 per cent last year, compared to 11.5 per cent for Norwich Union. "These companies had equity exposure of 70 to 80 per cent when the market started falling. They have since been forced to reduce their equity holdings. Many companies are not strongly capitalised, so it seems unlikely that this will change," Patrick Connolly at the independent financial adviser John Scott & Partners, said yesterday. He, along with many other financial advisers, do not recommend new investments in to with-profits funds, given the poor outlook for bonus rates. Mr Connolly said: "Given the equity exposure, customers could expect no more than 4 or 5 per cent, which does not make it a very attractive proposition."
Royal & Sun Alliance, Equitable Life and Britannic Assurance closed to new with-profits business recently. David Prosser, chief executive of Legal & General, has put the future of its with-profits fund under review.