Abbey National's woes with its life insurance businesses were felt by customers yesterday, as it scrapped bonuses to almost 1 million with-profits policyholders for the second year running.
Days after the bank partly blamed the solvency of its life businesses for a £686m loss for the year, policyholders of Abbey's Scottish Mutual and Scottish Provident were told they would receive no annual bonus this year. Final bonuses, which are added when policies mature, are also being reduced and payouts have come down by as much as 20 per cent.
"The stock market recovery has been insufficient in scale and of too short a duration to make up the shortfall from previous years," the company said. Abbey has drastically reduced the funds' exposure to equities over the past two years to ensure it can meet the high guarantees it has promised customers. Policyholders with guaranteed bonuses will get their minimum rate but the decision to reduce equity holdings has also meant that its funds see less of an upturn as equity markets revive.
Scottish Mutual has only 28 per cent of its fund invested in equities, and made an investment return of 8 per cent. Scottish Provident has 24 per cent in equities, and made a return of just 4.43 per cent. Abbey offered its customers the chance yesterday to switch out of its with-profits funds into alternative investment funds free from early encashment charges that would normally apply.
Ned Cazalet, an independent insurance analyst, said: "The guarantees have caused havoc with the fund as they are costly to finance. Although Scottish Mutual promised much, it has delivered very little. If policyholders take up the offer to switch, they give up their guarantees, which is good news for Abbey and its shareholders, who ultimately pick up the tab."
But anyone wanting to leave with-profits will still have a slice taken off their funds. Abbey is raising exit penalties by an average of 5 per cent on Scottish Mutual policies and by 10 per cent on Scottish Provident policies.
Prudential is the only major insurance company to have increased bonuses to its with-profits policyholders. Standard Life, Legal & General, Axa, Friends Provident and Aviva have all reduced policy values. Royal London, the mutual, joined them yesterday, cutting payouts by 11 per cent.
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