UK: With-profits mid-year bonus update

17 Jul 2009

  • Solid returns for With-Profit funds 
  • Strong long-term performance from With-Profit investments
  • Benefits of fund strength, smoothing and guarantees – investment fund returns beat cash and FTSE All-Share total return over past five years
  • MVRs reduced in line with final bonus rates.

Strong long-term performance from the With-Profit funds 
Since January 2009, the world’s stock markets have remained turbulent but Aviva’s With-Profit funds continue to protect investors from the full impact of the downturn in the stock market, commercial property markets and falling interest rates.

Comparison of managed, equity and with-profit funds over 10 years

chart showing comparison of managed, equity and with-profit funds over 10 years

This chart shows a £10,000 investment made in 1999 in the CGNU With-Profit fund through an investment bond, against the ABI UK All Companies and ABI Balanced Managed average funds. The values depicted each month are the surrender values and include any application of early exit charges or MVRs. Figures to 1 July 2009.

Strength of the fund - Over the past five years, a customer who invested in the main CGNU With-Profit fund through an investment bond would have seen a return of 25.2% which is equal to a return of 4.6% per annum (net of basic rate tax), demonstrating the financial strength of the fund and the benefits of smoothing. This has outperformed:

  • Cash (14.9%)*
  • The ABI Balanced Managed average fund (12.9%)
  • The FTSE All-Share Index (19.7%) total return, including dividends reinvested
    (Source: Lipper Hindsight).

* Moneyfacts average savings account, 90 days’ notice, for investments over £10,000.

Chart showing relative performance

The chart shows the returns of an investment bond invested in the CGNU With-Profit fund. The 10 year figures don’t include market value reductions because our no market value reduction guarantee was in place. Without this no market value reduction guarantee, the % return would have been 25.3%. Other data sourced from Lipper Hindsight based on investment return at 1 July 2009. The average savings account used is the Moneyfacts Average up to 90 days’ notice, with a £10,000 balance.

Regular bonus rates 
Regular bonus rates have been held on all conventional policies and Aviva Life & Pensions UK Ltd and CU unitised policies. For CGNU unitised policies, regular bonus rates have been reduced by 0.75% on life policies and 0.5% on pension policies. This means that the new business rate for bonds will be 2.75% from 1 July, which remains attractive compared to bank base rates falling from 2% at the end of 2008 to an all-time low of 0.5%.

Final bonus rates and Market Value Reductions (MVRs) 
In the six months to July 2009, the CGNU and CULAC funds recorded a decrease of 3.5%, Aviva L&P decreased 4.1% and the Provident Mutual fund decreased 0.8% (all figures are estimated and after tax). As a result, final bonus rates have been reduced; for those policies where an MVR may apply, MVRs have been reduced by an equivalent amount.

These changes are part of the prudent management of the fund, creating a balance between paying out to customers today and ensuring future performance.  

Despite these changes Aviva’s With-Profit funds continue to perform and compare well to other investments as the following examples demonstrate:

Strong long term returns for with-profits investors
With-profits continue to deliver attractive performance for investors, highlighting the benefits of financial strength and smoothing compared to alternative forms of investment, particularly during these difficult market conditions.

Bonds - £10,000 invested in a bond 10 years ago increased in value to £14,934 on 1 July 2009, outperforming an equivalent investment in:

  • The average savings account £13,038  
    Figures for the FTSE All-Share Index and ABI Balanced Managed Average do not take into account any charges
  • The ABI Balanced Managed Average £10,364
  • The FTSE All-Share Index £10,117 total return, including dividends reinvested.

Pensions - £200 a month invested in a pension over the past 15 years with a retirement date of 1 July 2009 has delivered an investment value of £51,647. This is equivalent to an annual return of 4.6% gross and represents an excess return of 2.7% above inflation giving customers greater spending power in retirement. Over the same period, it has outperformed:

  • The average savings account £47,492
  • The ABI Balanced Managed Average £45,079
  • The FTSE All-Share Index £44,219 total return, including dividends reinvested.

Endowments - a 25-year, £50 a month mortgage endowment maturing on 1 July 2009 has delivered an investment value of £38,776, £3,124 above the target   amount. In that time:

  • The average savings account has returned £25,047 over the same period*
  • The ABI Balanced Managed Average has returned £27,641
  • The FTSE All-Share index has returned £40,146 total return, including dividends reinvested**.

* The average savings account return includes simulated past performance for the period 1 July 1984 to 31 October 1985 as actual figures are not available. **FTSE All Share returns: past performance prior to 31 December 1985 does not include dividends as figures are not available; FTSE capital return figures used instead.

David Barral, marketing director at Aviva, said: “Aviva’s With-Profit funds continue to provide investors with attractive returns while protecting them from the extremes of volatile equity markets. Despite market conditions, customers invested in Aviva’s main With-Profit fund would have received a higher return than investing in an average savings account or average balanced managed fund, two of the most popular alternative investment options.”

Special bonus rate
In January 2009 the second of the three special bonus payments was added to CGNU and CULAC policy values. The last of the special bonus payments will be added to policy values in 2010. 

With-Profits Committee oversight
Customers are at the heart of everything we do and Aviva is committed to treating customers fairly at all times. To support this, Aviva has a With-Profit Committee that brings independent expertise and oversight to ensure fairness is embedded in with-profits decision-making. 

Valuable guarantees
About 86% of with-profits bond policyholders benefit from valuable policy guarantees. This year, 50,000 bond policies are eligible for a policy guarantee and more than 33,000 customers’ policies will reach their 10-year anniversary and become eligible to take advantage of an MVR-free guarantee. Aviva’s standard practice is to write to customers in advance of their guarantee dates, bringing these valuable guarantees to their attention. 

Facts and figures

1. Investment in the CGNU With-Profit Fund in July 2009
The proportion in shares and property held in the With-Profit Fund was 48% as at 30 April 2009. This ratio has been actively managed down from 55% at the end of 2008. 

This ratio will continue to be actively managed and it is this management that has been a major factor in the fund outperforming other forms of investment in the longer term.

Chart showing CGNU with-profit fund investment mix - as at 30 April 2009

2. Policy values – 2009
Figures in tables below include special bonus payments where applicable. 

Onshore Investment bond five and ten years

Date of investment

Value 01/07/09

Annualised return

Cash return**

01/07/2004

£12,517

4.6%

2.8%

01/07/1999

£14,934 (incl value of guarantee)

4.1%

2.7%

These examples are based on a £10,000 investment for a male aged under 75 at outset.

Offshore Investment bond five years

Date of investment

Value 01/07/09

Annualised return

Cash return**

01/07/2004       

£120,375

3.8%

3.5%

These examples are based on a £100,000 investment for a male aged under 75 at outset.

Pension policy – 15 years – Date of Investment 01/07/1994

 

Retirement date value 01/07/09

Annualised return

Cash return**

CGNU (incl. GA)

£51,647

4.6%

3.5%

CULAC

£52,948

5.0%

3.5%

 Aviva L & P

£47,026

3.5%

3.5%

The above examples are based on a male, investing £200 a month for 15 years from 1 July 1994 with the policy maturing at age 65, with a return of fund death benefit. The figures at 01/07/09 assume retirement at selected retirement age and therefore benefit from the MVR-free guarantee. 

Mortgage endowment (no promise) – 25 years – Date of Investment 01/07/1984

 

Maturity value 01/07/09

Target amount 01/07/09

Excess over target

Annualised return

Cash return**

CGNU (incl. GA)

£38,776

£35,652

£3,124

6.9%

3.9%

CULAC

£32,576

£37,121

-£4,545      

5.7%

3.9%

 Aviva L & P

£30,853

£36,029

-£5,176       

5.3%

3.9%

PM*

£28,995

£35,620

-£6,625

4.9%

3.9%

 

Savings endowment – 25 years – Date of Investment 01/07/1984

 

Maturity value 01/07/09

Annualised return

Cash return**

CGNU (incl. GA)

£39,735

7.1%

3.9%

CULAC

£35,174

6.2%

3.9%

 Aviva L & P

£31,973

5.6%

3.9%

PM*

£29,859

5.1%

3.9%

* Investments not switched to CGNU mid-2005. The above endowment examples are based on a male, non-smoker, aged 29 investing £50 a month for 25 years with the policy starting on 1 July 1984.

Money in a savings account is accessible and safe, and interest, once earned, is guaranteed.  In comparison, with-profits investment is for the medium to long-term, and its value could fall.  Tax treatment is also different.

** The average savings account used is the Moneyfacts Average up to 90 days’ notice, with a £10,000 balance. 

3. How investment bond returns compare to cash and an equivalent investment against other benchmarks

Onshore Investment bond – 10 years

 

Original investment 1/07/1999

Value of investment after 10 years (including special bonus)

Annualised return

CGNU (incl. GA) with-profits bond

£10,000

£14,934 (including value of guarantee)

(£12,528 with MVR if applicable)

4.1% (2.3%)

Bank/building society account

£10,000

£13,038

2.7%

FTSE All-Share Index

£10,000

£10,117

0.1%

ABI Cautious Managed Average

£10,000

£10,860

0.8%

ABI Balanced Managed Average

£10,000

£10,364

0.4%

Examples are based on a £10,000 investment made on 1 July 1999. The original investment plus increase in Consumer Price Index (CPI) would be £11,955, an annualised return of 1.80%. Returns are quoted net of basic rate tax. 

Important notes: Future bonus rates are not guaranteed and may vary, as they depend on profits yet to be earned. Past performance is not a guide to the future. The value of investment-linked funds can go down as well as up and is not guaranteed. The illustrative maturity amounts include periods of high inflation and high investment returns.

We may apply a market value reduction on encashments, but not on maturities or death, which will reduce what a customer would get back from the unitised With-Profit fund. Past performance is based on the charging structures applicable to the products at the time the policies were effected. Different charging structures apply to the current products.

4. Market value reductions 

MVR rate changes

Year units purchased

Average MVR rate as at 1/1/09

Average MVR rate as at 1/7/09

1988

5%

5%

1989

14%

14%

1990

6%

6%

1991

7%

0%

1992

7%

1%

1993

7%

1%

1994

6%

2%

1995

5%

1%

1996

5%

3%

1997

8%

8%

1998

15%

15%

1999

16%

16%

2000

20%

20%

2001

11%

11%

2002

5%

2%

2003

7%

1%

2004

5%

2%

2005

10%

9%

2006

16%

16%

2007

18%

18%

2008

10%

9%

Market Value Reductions - Market Value Reductions are being reduced for the second time this year. From 1 July 2009, the average MVR is being reduced from 11% to 10%. MVRs are a way of ensuring that those policyholders leaving or wishing to take money out of the fund do not take more than their fair share of the fund at the expense of those policyholders who remain.

MVRs are currently being applied on some unitised policies for those policyholders wishing to take money out of the fund. For unitised endowments and pensions, MVRs apply only when the policy is encashed early. MVRs do not apply on maturity or if the policyholder dies. The actual MVR applied will differ depending on the year the policy was actually taken out.

How an MVR works
Suppose there are three investors in a with-profits fund, who each pay in £10,000, so the total with-profits fund is worth £30,000. Stock markets fall by 10% so that the total with-profits fund drops to £27,000. If one investor then withdraws his original £10,000, without introducing an MVR, this would leave only £17,000 in the fund to be shared between the remaining two investors. The investor who encashed his policy early would take more than his fair share of the fund.

-ends- 

Press office contacts:
Louise Soulsby - 01904 452617 / 01904 452791 / 01904 452828          
Out of hours 07800 699526 

David Gwyer - 01904 452659 / 07800 693187

Notes to editors:

At the end of 2008 Aviva has approximately 2.3 million with-profits customers of which 0.8 million are endowments, 1 million are pensions and 0.5 million are investment bonds. At the end of December 2008, the total value of Aviva’s with-profits funds was approximately £52 billion. (CGNU £14 billion, CULAC £14 billion, Aviva Life & Pensions UK Ltd £22 billion, PM £2 billion).

Statistics for the mortgage endowment shortfall status mailing undertaken in 2008 are: 6% of policies on "green" and 94% "red" (of which 20% would have been amber). For policies maturing in 2009, 11% are "green".

About Aviva
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