As a result of continuing poor stock market returns, Norwich Union is reducing final bonus rates on both unitised and conventional with-profits policies. This will result in payouts being reduced by around 5 per cent. The changes take effect from 1 August.
As a result of continuing poor stock market returns, Norwich Union is reducing final bonus rates on both unitised and conventional with-profits policies. This will result in payouts being reduced by around 5 per cent. The changes take effect from 1 August.
Norwich Union is also reducing the regular bonus rates on unitised with-profits policies by 0.5 per cent, effective from 1 August. Similar changes are under consideration for conventional with-profits business at the year-end.
The changes to bonus rates have been made due to the continuing adverse conditions in the UK stock market which has fallen by as much as 25 per cent this year. This decline in 2002 follows poor stock market performance in 2001 (down 16 per cent) and 2000 (down 10 per cent). The impact on the with-profits fund has been to see an overall return, to 18 July this year, of minus 8.3 per cent. This compares to an assumption, when setting bonuses at the start of the year, that the fund would earn a positive return of 7.25 per cent for the full year.
However, the financial strength of the with-profits fund has enabled Norwich Union to smooth the performance of its with-profits policies resulting in a lower reduction in payout than real investment returns would dictate.
Customers still continue to enjoy good returns on their investment at a time when we have the lowest interest rates and underlying rate of inflation for decades. A 25 year with-profits mortgage endowment has on average produced a return of 11.1 per cent a year compared to inflation of 4.1 per cent over the same period.
Commenting on the changes, chief actuary, Mike Urmston, said: " This year, we have been paying out, on average across all with-profits products, 122 per cent of policy earnings. We are now reducing the final bonus to bring payouts closer to our published guideline of no more than 110 per cent of policy earnings under normal conditions.
"The change in regular bonus rates is part of the prudent management of the with-profits fund. We are seeking to achieve the correct balance between the proportion of the overall return that is paid in the form of bonuses guaranteed on maturity or retirement , and the non-guaranteed final bonus.
"Norwich Union remains committed to with-profits and believes that it meets a real need for many consumers. At times of such economic uncertainty and extreme volatility in the stock market, new and existing customers welcome more than ever access to pooled long-term investments with smoothing of underlying returns."
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Notes to editors
Norwich Union is the UK's largest insurer. It is the UK's largest provider of life, pensions and investment products and one of the leading IFA providers. IFAs provide around 75% of the company's long-term savings business. Norwich Union has strategic alliances with building societies and other leading UK brand names including Tesco Personal Finance and The Royal Bank of Scotland Group.
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Bonus Terms Explained
There are two types of with-profits policies: Unitised and Conventional.
Unitised
Contributions buy units in the With-Profits Fund. The unit price increases as the annual bonus is added on a daily basis.
The payout for a unitised with profits policy is made up of two elements: The value of units and final bonus.
Value of units: This is the value of the units held.
Final Bonus: At the date of claim the value of the units is compared with the total earnings of the policy. Any balance is made up by the declaration of a final bonus. Scales are expressed as a percentage of the unit value and vary according to the year the money was invested. Different final bonus rates will apply to the units bought with the different years’ contributions.
Conventional
Contributions secure a guaranteed benefit. Bonuses are added to the guaranteed benefit annually and at the end of the policy term as detailed below.
The payout under a conventional with-profits policy is made up of three elements: the guaranteed benefit, regular bonus and final bonus.
Guaranteed benefit (also known as sum insured): This is the amount payable at the date of the claim (eg. maturity or earlier death). Bonuses are added to this amount over the term of the policy to make up the final payout.
Regular Bonus (also known as annual or reversionary bonus): This is the amount added to a with-profits policy each year. It is a payment on account towards the full share of policy earnings which will be payable at the date of claim. For most policies it is expressed as one percentage applying to the guaranteed benefit and a further percentage applying to the bonus already added in previous years.
Final bonus (also known as terminal or additional bonus): At the date of claim the total of the guaranteed benefit and regular bonuses to date is compared with the total earnings of the policy. Any balance is made up through the declaration of a final bonus. Final bonus rates are expressed as a percentage of the guaranteed benefit and will form a scale of rates that will vary according to the year the policy was taken out.
Please note: The above is designed as an introduction to bonus terms. For details relating to specific policies, please refer to the policy terms and conditions.
Impacts of Smoothing
The smoothing of payouts is still evident even after today’s announcement as the following example shows.
£10,000 Bond started on 1 Jan 1992:
| 1 Jan 2001 | 1 Jan 2002 | 1 Aug 2002 | |
| With Profits | £24,796 | £23,198 (-3%) | £ 22,509 (- 3 %) |
| Managed Funds | £22,376 | £20,364 (-9%) | £ 17,910* (-12%) |
| * based on value at 19 July 2002 | |||
Unitised Bonus - Payout Tables And Regular Bonus Rates
The following tables show changes to regular bonus rates and comparative maturity payouts following the bonus declaration for the three main companies that now form part of Norwich Union.
- Norwich Union writes new with-profits business in the CGNU Life with-profits fund. The CGNU Life fund was previously the CGU fund. It has been chosen because of its stronger position in relation to equity backing ratio and superior pay out record, particularly for long term contracts
- To maintain financial strength, investment flexibility and to facilitate the eventual merger of the with-profits funds, a proportion of the with-profits business will be reassured to other with profit funds in the CGNU Group, namely the Commercial Union Life (CU) and the NU Life (NUL&P) funds
- Investment objectives and risk controls for the 3 with-profit funds are the same as for CGNU Life.
Regular Bonus (all companies) for the main products for 2002
| 1 August | 1 Jan – 31 July | |
| Life Business (including investment bonds) | 3.75% | 4.25% |
| Stakeholder Pensions | 4.25% | 4.75% |
| Other Pensions | 4.75% | 5.25% |
Payouts
CGU (including General Accident)
With-profits bond
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Effected 10 years ago: | |||
| Unit value | £18,766 | £19,329 | |
| Final bonus | £3,190 | £3,869 | |
| Total payout | £21,956 | £23,198 | |
| Yield | 8.2% | 8.8% | 2.4% |
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Unit value | £32,340 | £32,657 | |
| Final bonus | £1,404 | £2,443 | |
| Total payout | £33,744 | £35,100 | |
| Yield | 6.6% | 7.4% | 2.4% |
10 year personal pension
Commercial Union
With-profits bond
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Effected 10 years ago: | |||
| Unit value | not applicable yet | not applicable yet | |
| Final bonus | |||
| Total payout | |||
| Yield |
10 year personal pension
| Maturing 1.8.02 | Maturing 1.1.00 | Average rate of Inflation to July 2002 | |
| Unit value | £31,601 | £31,790 | |
| Final bonus | £1,957 | £2,992 | |
| Total payout | £33,558 | £34,782 | |
| Yield | 6.5% | 7.2% | 2.4% |
Norwich Union Life & Pensions (NUL&P)
With-profits bond
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Effected 10 years ago: | |||
| Unit value | £17,221 | £17,629 | |
| Final bonus | £3,444 | £4,055 | |
| Total payout | £20,665 | £21,684 | |
| Yield | 7.5% | 8.0% | 2.4% |
10 year personal pension
| Maturing 1.8.02 | Maturing 1.1.00 | Average rate of Inflation to July 2002 | |
| Unit value | £31,192 | £31,466 | |
| Final bonus | £2,493 | £3,100 | |
| Total payout | £33,724 | £34,566 | |
| Yield | 6.6% | 7.1% | 2.4% |
The bond examples above are based on a £10,000 single contribution made by a man under age 75 at outset. The Pension example is as issued to a male for a monthly premium of £200, maturing at age 65, with a return of fund death benefit. Other examples are available on request.
Conventional Bonuses - Payout Tables
CGU (including General Accident)
10 year endowment
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Guaranteed benefit | £5,322 | £5,322 | |
| Regular bonus | £2,139 | £2,276 | |
| Final bonus | £448 | £456 | |
| Total payout | £7,909 | £8,054 | |
| Yield | 5.4% | 5.7% | 2.4% |
25 year endowment
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Guaranteed benefit | £14,241 | £14,241 | |
| Regular bonus | £28,950 | £28,926 | |
| Final bonus | £42,327 | £46,620 | |
| Total payout | £85,518 | £89,787 | |
| Yield | 12.0% | 12.3% | 4.1% |
Commercial Union
10 year endowment
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Guaranteed benefit | £5,361 | £5,361 | |
| Regular bonus | £1,979 | £2,160 | |
| Final bonus | £587 | £602 | |
| Total payout | £7,927 | £8,123 | |
| Yield | 5.4% | 5.9% | 2.4% |
25 year endowment
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Guaranteed benefit | £13,200 | £13,253 | |
| Regular bonus | £42,207 | £43,980 | |
| Final bonus | £26,595 | £29,761 | |
| Total payout | £82,002 | £86,994 | |
| Yield | 11.8% | 12.1% | 4.1% |
Norwich Union Life & Pensions (NUL&P)
10 year endowment
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Guaranteed benefit | £5,533 | £5,533 | |
| Regular bonus | £1,472 | £1,472 | |
| Final bonus | £1,245 | £1,300 | |
| Total payout | £8,250 | £8,305 | |
| Yield | 6.2% | 6.3% | 2.4% |
25 year endowment
| Maturing 1.8.02 | Maturing 1.1.02 | Average rate of Inflation to July 2002 | |
| Guaranteed benefit | £14,559 | £14,559 | |
| Regular bonus | £32,292 | £32,292 | |
| Final bonus | £23,222 | £26,789 | |
| Total payout | £70,073 | £73,640 | |
| Yield | 10.8% | 11.1% | 4.1% |
The endowment policy examples above are based on a male aged 30 next birthday, when the policy was started, for a monthly premium of £50.
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 adjustment factor on encashments (except on maturity or death) which will reduce what you get back from the unitised with-profits 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. Full written terms and conditions of Norwich Union products are available on request. Norwich Union is regulated by the Financial Services Authority and only advises on its own products. All charging structures are applied to the product at the time the policy was effected.