Prudential, thought to be one of the most financially strong of the UK's life assurers, has been forced to cut maturity payouts by 7 per cent after failing for the third time this year to protect its 2.5 million with-profits policyholders from the ravages of the stock market.
This means the average with-profits policy has now been reduced by 12 per cent over the year.
Prudential's apparent strength had been based on its decision to sell £15bn of equities in 1999 in the belief valuations were too high. It made a tactical switch towards bonds in the hope of finding better returns for policyholders. But even reducing the proportion of its fund invested in equities from 72 per cent to 47 per cent in the past two years has not been enough to allow it to maintain payout levels.
Almost all of the big insurers have had to make additional rounds of bonus cuts this year, to make the amount they pay out to policyholders reflect the steep decline in their asset values and help stem the outflow of capital from the with-profits fund.
Scottish Widows has brought down policy values by 22 per cent over the year, Norwich Union has levied 15 per cent reductions, Friends Provident has cut by 23.5 per cent, Royal Life by 24 per cent and Royal & SunAlliance by 28 per cent.
"This is a prudent move to protect the strong financial position of the fund and the interests of our ongoing customers. Customers can be reassured that our with-profits fund has outperformed the market and is providing them with solid returns compared to other investment options, even in such demanding market conditions," Mark Wood, the chief executive of Prudential in the UK, said.
That Prudential is once again forced to reduce policyholder payouts indicates other insurers, who have had a greater exposure to the falling stock market, may well have to take similar action. Standard Life started off the year with 73 per cent invested in equities, which came down to 57 per cent by the end of October. It has only made one interim bonus cut this year, by 10 per cent, and introduced an exit penalty of 10 per cent. Sharp cuts are expected when the company reveals its year-end results in February.
Prudential's with-profits fund made an underlying investment return of minus 8.4 per cent in the year to the end of October, compared with a fall in the FTSE over the same period of 22.6 per cent.
Prudential policyholders saw up to 12 per cent lopped off their maturity values in February this year, when its yearly declaration was made. Further cuts of between 5 per cent and 10 per cent were then announced in September after months of stock market declines.
The company has also folded on its promise not to impose exit penalties on people cashing in early on policies worth less than £25,000 in October. Now anyone cashing in on more than £10,000 who has invested for five years will face an exit penalty of about 3 per cent.
Anyone with a Prudential with-profits investment policy, savings policy, pension or endowment will see an average of 7 per cent cut from the final bonus. On a 10-year with-profits Prudence bond, where the investor paid a lump sum of £10,000, the payout from today will be £20,916, compared with £22,415 if it had matured yesterday.
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