Scottish Widows slashes its with-profits payouts by up to 20 per cent

Scottish Widows, the insurance company owned by Lloyds TSB, yesterday became the latest insurer to tell its one million with-profits policyholders their payouts would be cut by up to 20 per cent.

Final bonuses, which are applied when the policy matures, have been cut by an average of between 12 and 15 per cent. Annual bonuses have been brought down to as low as 0.5 per cent on some policies, with 2.5 per cent the highest bonus available on a pension policy.

A 10-year £10,000 endowment policy will now pay out £19,619, compared with £20,302 if it had matured last year. A 10-year £10,000 pension policy will pay out £15,002, compared with £19,076 last year. Policyholders are receiving £500m in bonuses for 2002, from Scottish Widows, despite it making a loss on its with-profits fund of 9 per cent.

Mike Ross, the chief executive of Scottish Widows, said: "The past three years have seen unprecedented sustained falls in stock market levels, which – together with lower interest rates – have affected the returns on most types of investment." He said even assets such as fixed interest and property, which have recently provided better returns than equities, are typically earning lower returns than in previous years.

Scottish Widows is paying policyholders 10 per cent more than the value of the assets backing policies in the with-profits fund.

Mr Ross said paying out too much in bonuses would harm the financial strength of the fund and potentially limit returns that could be earned for policyholders in the future.

Insurers throughout the sector are delivering a similar message to policyholders. They have had their ability to reward investors severely limited by falling stock markets and have to draw on their capital reserves in order provide returns to policyholders.

Aviva last week scrapped both final and annual bonuses for some policyholders. It said its fund had made a loss of 8.6 per cent, and paid out £1.5bn to its 3.3 million policyholders from its reserves. Britannic Group, which warned its profits would fall below expectations for 2002, said it is likely to suspend all annual bonuses because stock markets had ravaged its capital.