Bonus cuts questioned

INSURANCE companies have cut bonuses on with-profit endowment policies and Michael Ford, a retired engineer from Guildford, Surrey, was not content to let this pass unchallenged, writes Maria Scott.

He wrote to three insurers with which he has policies - Equitable Life, Standard Life and Scottish Widows - to suggest that there might be a fairer way to organise their bonuses.

The bonus system is intended to make with-profit policies a relatively safe way of investing in the stock market. Bonuses are paid annually and, once added, cannot be taken away.

At the end of the contract term, a 'terminal' bonus is paid. However, this is not guaranteed and companies are free to vary it. Mr Ford believes this variability is inappropriate.

He suggested to the three insurers that a terminal award be built up in a similar manner to the annual declared bonus. The policy benefit statement could show the annual sum awarded towards the terminal bonus. This would still only be paid on maturity but the system would discourage early surrenders and take away the windfall element of the policies.

Scottish Widows told Mr Ford: 'If we were to adopt this approach, we would need to invest to meet the additional guarantee and would be restricted to holding the less volatile investment types. The endowment policy would then become very similar to a bank or building society deposit account, and the investment freedom, which has resulted in very much better returns on endowments than on deposit accounts, would be lost.'

A similar response came from Standard Life. Equitable Life said: 'Each year we announce an overall growth rate which is applied to the accumulating total policy value and, within that total growth rate, part is consolidated as declared bonuses with the balance remaining as the final bonus.'