Standard Life forced to impose exit penalty and slash with-profits payouts

Standard Life finally bowed to pressure from the falling stock market yesterday by cutting payouts on with-profits policies by 10 per cent as well as imposing an exit penalty of 10 per cent on anyone wanting to cash in their policy early.

The Edinburgh-based mutual insurance company, run by the chief executive Iain Lumsden, has been notable for maintaining its bonus rates and allowing policyholders to cash-in early without any penalties while markets have been at historically low levels. Most other major insurers, including Aviva and Prudential, have reduced bonuses and introduced exit penalties to protect themselves against further drains on their capital while markets have been low.

Standard's stance has been even more exceptional, given that it has a very high proportion of its with-profits fund in equities – which was 76 per cent at the start of the year – while rival insurers have moved money in to less volatile investments such as bonds.

At the end of 2000 – when the company successfully fought off a demutualisation campaign – Standard had surplus assets of £8.4bn, which it said was "no more, and no less" than it needed to employ its equity-led investment strategy. By the end of 2001, the company's surplus assets, from which final bonuses are paid, had fallen to £3.3bn.

Mr Lumsden has insisted the company is pursuing a sensible investment strategy and is still well-capitalised.

This is the first time Standard has changed its bonus levels for its 2.1 million policyholders. A 30-year-old male with a 10-year £50-a-month endowment policy maturing today will receive £8,896, compared to £9,875 before the 10 per cent reduction. For a male paying £200 in to a pension over 25 years, the cut amounts to nearly £70,000.

John Hylands, the finance director at Standard, said bonuses were cut in response to the poor market conditions and not because the company's financial position had deteriorated.

Tom McPhail, at financial adviser Hargreaves Lansdown, said the move was inevitable. "Standard has been holding its hand over a candle and is admitting now that it is getting burned. The value policyholders are getting is still very good, because people are being paid out much more than the value of their underlying assets."

Until the end of June, the with-profits fund had made an investment return of –5.2 per cent but has been subjected to further falls on markets.

Scottish Equitable, the Edinburgh insurer owned by the Dutch giant Aegon, yesterday joined insurers in launching new with-profits funds where 100 per cent of funds are returned to policyholders.