Norwich Union faces pounds 500m bill for guaranteed annuities

NORWICH UNION is facing a bill of over half a billion pounds to pay for guaranteed annuity incomes offered to customers who took out pension policies in the 1960s, 1970s and 1980s.

The bill stems from clauses in old pension contracts which typically promised savers an annual income in retirement worth 20 per cent of the amount they saved, compared with around 9 per cent if no guarantee had been offered.

Like other offices, Norwich Union believed it could afford the guarantees because long-term interest rates had historically been high. But rates have plunged over the past year, forcing offices to finance the guarantees from reserves.

Norwich Union's bill could rise even higher to approach pounds 1bn, if long- term interest rates stay at today's levels. The key interest rate, the yield on 15-year gilts, yesterday touched a record low of 4.19 per cent, down from 6.25 per cent a year ago.

The Government Actuary and the Financial Services Authority wrote to life offices this week with instructions on how to deal with annuity guarantees.

But regulators are refusing to disclose the cost of the problem to each particular company. Estimates from the Government Actuary put the total cost at pounds 7bn. Analysts are warning that the guaranteed annuities could push some life offices into dropping the amount they pay out in bonuses to policyholders.

As long-term interest rates fell to a record low of 4.19 per cent yesterday, Norwich Union declared a 12 per cent cut in the annual bonus it pays each year to pension policies.

Holders of with-profits policies this year will receive a 6 per cent annual bonus, compared with 6.75 per cent at the same time last year. Savers will receive 5.5 per cent, compared with 6 per cent last year.

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