Our with-profit funds have seen a second year of positive investment returns which has resulted in an increase in the underlying value of customers’ policies. Policies maturing continue to pay competitive returns and compare well to other forms of investments.
- Bonuses totalling Ł1.0 billion declared for 3 million with-profit policies during 2004.
- Continued commitment to policyholders through the mortgage endowment promise with current reserving of around Ł1 billion
- Positive investment return on the CGNU with-profit fund of 11.5% before tax
- Some regular bonus rates reduced in view of the level of guarantees already built up on policies
- Policy payouts continue to compare favourably to other investments and have produced good returns:
- A 25 year Ł50 a month CGNU mortgage endowment will pay Ł52,576, which is Ł23,797 over the target amount of Ł28,779 – a return of 8.9% p.a. tax free*
- A 20 year Ł200 a month CGNU pension will pay Ł113,392 – a return of 7.9% p.a.*
- Returns on policies that have been held for a short term continue to be significantly impacted by the poor market conditions of 2000–2002.
* Returns quoted assume the policies mature on 1 January 2005. Endowment example is for a 29 year old male at the outset of the policy.
Press office contacts:
Norwich Union Life press office: 01904 452791 / 452617 / 452828
Out of hours:
James Evans: 07800 699525
Louise Soulsby: 07800 699526
Rob Pell: 07800 699563
Contents
1) The economic background affecting with-profit policies
2) The investment return on the with-profit funds
3) Our mortgage endowment promise for policyholders
4) How returns on with-profit policies compare to other types of investments
5) Regular bonus rates for policyholders for 2005
6) Payout values for policyholders for 2005
7) Investments in the with-profit funds
8) Changes to cash-in values for unitised policies (known as MVR rates)
9) Payout examples for policies in 2005
Mike Urmston, chief actuary of Norwich Union Life, said:
“Our with-profit funds have seen a second year of positive investment returns which has resulted in an increase in the underlying value of customers’ policies. Policies maturing continue to pay competitive returns and compare well to other forms of investments.
“We are also taking this opportunity to restate our commitment to support customers through our mortgage endowment promise where we have set aside Ł1 billion to support this promise. We believe that this valuable promise is sustainable under today’s market conditions given the strength of our with-profit funds.”
1) The economic background affecting with-profit policies
During 2004 the world economic climate stabilised following the improvements seen in 2003. This has resulted in a second year of positive investment returns in our with-profit fund. However, the last two years of positive returns have not compensated for the negative returns of the previous three years and the FTSE 100 index ended 2004 at 4,814, around 2,100 points below its peak level of 6,930 at the end of 1999.
Inflation remains at a low level of around 1.5% with the outlook for this to edge up to around 1.9% for 2005. Base rates have increased during 2004 to 4.75% – with the expectation that these will end 2005 at the same level. The long-term outlook for investment returns is lower than the 1980s and 90s, however we believe that a 7% a year (before tax and charges) return is achievable on the main CGNU/CULAC with-profit funds.
2) The investment return on the with-profit funds
We have seen another year of positive returns on the CGNU and CULAC with-profit funds in 2004 of 11.5% before tax. This reflects the improving stock market conditions and a particularly good year for property investments. The comparable returns in 2003 and 2002 were 12.1% and minus 7.7% respectively before tax. The return on the NULAP with-profit fund was 10.2% before tax, while the return on the Provident Mutual (PM) fund was 7.6% before tax. The PM figure reflects the higher proportion of assets invested in fixed interest investments.
The investment return has been passed on to our policyholders through an increase in the underlying value of their policies (known as the asset share).
3) Our mortgage endowment promise for policyholders
Norwich Union launched its mortgage endowment promise in 2000 to assist policyholders who, at the time of the announcement, were in a position of shortfall on their mortgage endowment. This promise was designed to help people make up this shortfall on a mortgage endowment policy when it matured and is needed to pay off the mortgage. The mortgage promise was conditional on the company earning a sufficient investment return on its free reserves.
While Norwich Union has not earned the level of investment return required during a number of the years in which the promise has been running, it is committed to supporting the promise as long as this is not to the detriment of other policyholders. The company has already reserved around Ł1 billion to pay for endowment shortfall assistance – underlining the strength of our with-profit funds.
Norwich Union believes that its mortgage endowment promise remains viable under the current and improving market conditions and as a result is not under review. If market conditions were to change significantly in the future then the promise may be reviewed. Norwich Union has committed to its customers that if it was to review the promise, that it will give policyholders at least three years’ notice of any proposed changes.
4) How returns on with-profit policies compare to other types of investments
Investment bond – 10 years
| Investment product | Original investment | Value of investment after 10 years | Return before deducting inflation of 2.7% |
|---|---|---|---|
| CGNU with-profit bond | Ł10,000 | Ł17,493 | 5.8% |
| NULAP with-profit bond | Ł10,000 | Ł17,440 | 5.7% |
| CULAC with-profit bond | Ł10,000 | Ł17,471 | 5.7% |
| NULAP balanced managed unit-linked fund | Ł10,000 | Ł16,719 | 5.3% |
| NULAP Equity unit-linked fund | Ł10,000 | Ł18,063 | 6.1% |
| Bank/building society savings account | Ł10,000 | Ł14,191 | 3.6% |
| Examples based on a Ł10,000 single investment made on 1 January 1995. The bank/ building society savings account illustration is compiled from an aggregate of 19 bank and building society rates, chosen to represent the industry as a whole, for a deposit of Ł2,500 to Ł25,000. Source: Micropal S&P. When comparing different types of investment and savings products you should bear in mind that access, tax treatment and risk to your money may differ. | |||
Pension – 20 years
| Investment product | Amount of investment | Value of investment after 20 years | Return before deducting inflation of 3.15% |
|---|---|---|---|
| CGNU (incl.GA) with-profit pension | Ł200 per month | Ł113,392 | 7.9% |
| NULAP with-profit pension | Ł200 per month | Ł112,979 | 7.9% |
| CULAC with-profit pension | Ł200 per month | Ł120,516 | 8.4% |
| Provident Mutual with-profit pension | Ł200 per month | Ł95,287 | 6.4% |
| NULAP UK balanced managed unit-linked fund | Ł200 per month | Ł96,271 | 6.5% |
| NULAP UK Equity unit-linked fund | Ł200 per month | Ł102,029 | 7.1% |
| Examples based on a Ł200 per month investment started on 1 January 1985. | |||
5) Regular bonus rates for policyholders for 2005
Unitised policies
Money is invested in a unitised with-profit fund, and units are allocated to policyholders. In a unit-linked fund, units go up and down with market movements, in a unitised with-profit fund, they increase steadily at a rate, determined annually, (the annual bonus rate). At the time of a claim, a final bonus may be added to reflect additional smoothed returns over the annual bonus rate.
- Explicit charged unitised policies, no change from the following: Life/investment policies 4.25%, pensions 4.00%, stakeholder pensions 3.50%
Explicit charged policies are policies where the bonus rate is expressed as a gross rate before the deduction of the 1% annual fund management charge. - Implicit charged life/investment policies: All NULAP and CGNU from October 1998 reduced from 2.5% to 2%. All CULAC and CGNU before October 1998, no change from 2.50%
- Implicit charged pensions: NULAP/CULAC reduced from 4% to 3%. CGNU remains at 3%
Implicit charged products means that the annual management charge for the policy is deducted from the investment return before the annual bonus rate is set.
The different levels of bonus rates for the implicit and explicit (net of charges) policies reflects the level of guarantees built up in the different ranges of policies and the differing investment periods during which money has been invested.
Conventional policies
Policies have an initial amount that is guaranteed to be payable to the policyholder on maturity. Each year this guaranteed amount can be increased by an amount called an annual bonus (formerly known as a reversionary bonus). At maturity, an additional amount, called a final bonus (formerly known as a terminal bonus) may also be added, such that the amount paid out reflects what the policyholder’s investment is actually worth, subject to smoothing.
- Life, investment and pension policies for NULAP, CGNU and CULAC policies, no change to regular bonus rates. Regular bonus rates on these policies range from 0% to 1%. Regular bonus rates on Provident Mutual policies are all now 0%. The bonus rates reflect the level of valuable guarantees in the funds.
The above bonus rates on unitised and conventional policies are applicable until further notice.
6) Payout values for policyholders for 2005
Unitised policies
- Policy values have all increased during 2004. Final bonus rates have also increased (except for money invested between 1998 and 2001 where an MVR is applying).
Conventional policies
Life, investment and pension policies – for all Norwich Union companies:
Regular premium life and pension policies:
- Payouts on policies with a term of 10 and 15 years will change by +2% to –8%.
- Payouts on policies with a term of 20 and 25 years will be lower by 6% to 10%
Single premium pension policies:
- Payouts on policies with a term of 10 and 15 years will change by +5% to –9%.
- Payouts on policies with a term of 20 and 25 years will be lower by 5% to 10%
Payouts on polices reflect the investment earnings during a period a policy is actually held and invested. As policies are held over different investment periods then payouts differ. A policy started in 1975 which matured in 2000 will reflect investment earnings during the specific 25 year period. A policy taken out in 1980 and maturing in 2005 will reflect investment earnings during this specific 25 year period. These are different investment periods and hence the difference in returns on a year on year basis. This is why payouts on a 25 year policy, for example, will continue to reduce even in years with positive investment returns.
7) Investments in the with-profit funds
Investments of the CGNU with-profit fund at the end of 2004
| Investment type | % at the end of 2004 | % at the end of 2003 |
|---|---|---|
| UK shares | 42.9 | 41.4 |
| International shares | 8.0 | 9.3 |
| Property | 16.0 | 14.5 |
| UK fixed Interest/bonds | 24.0 | 26.1 |
| International bonds | 3.7 | 4.4 |
| Cash | 5.4 | 4.3 |
The equity backing ratio (EBR) (the proportion of money invested in shares and property) increased from 65.2% at the start of 2004 to 66.9% at the end of the year.
The equity backing ratio of the CULAC fund is 66.9%, the NULAP fund is 48.2% and Provident Mutual fund is 10.1%.
The higher the EBR, the better the long-term performance potential of the fund.
8) Changes to cash-in values for unitised policies (known as MVR rates)
Market value reductions (MVRs) apply when the quoted value of units is above the policyholder's 'fair share' of the fund- known as the asset share. Asset shares have increased during the year as a result of positive investment earnings. To reflect this MVRs have been reduced. The level of the reduction is not the same in each fund, due to the different investment earnings achieved and the level of smoothing applied. In particular the level of smoothing in the CGNU/CULAC fund has been reduced to bring payouts (after any application of an MVR) closer in line with asset shares.
Average MVR rates* for money invested in a specific year
| 1998 | 12% |
| 1999 | 17% |
| 2000 | 18% |
| 2001 | 8% |
| 2002 | 2% |
The higher MVR rates reflect money invested when the stock market was around its peak.
* life and pension products across CGNU, NULAP and CULAC with-profit funds.
9) Payout examples for policies in 2005
Unitised with-profit policies
Investment bond – 10 years
| Company | Cash-in value 01/01/04 | Cash-in value 01/01/05 | Including a final bonus of | Increase in value during 2004 |
|---|---|---|---|---|
| CGNU (incl GA) | Ł16,251 | Ł17,493 | Ł833 | Ł1,242 |
| NULAP | Ł16,401 | Ł17,440 | Ł1,728 | Ł1,039 |
| CULAC | Ł15,640 | Ł17,471 | Ł1,142 | Ł1,831 |
| The example above is based on a Ł10,000 single contribution on 1 January 1995, made by a male aged under 75 at the outset and shows the change in policy value over 2004. | ||||
Conventional with-profit policies
Pension – 20 years
| Company | Maturity Value 01/01/05 | Including a final bonus of | Return before deducting inflation of 3.15% |
|---|---|---|---|
| CGNU (incl GA) | Ł113,392 | Ł1,353 | 7.9% |
| NULAP | Ł112,979 | Ł0 | 7.9% |
| CULAC | Ł120,516 | Ł4,635 | 8.4% |
| Provident Mutual | Ł95,287 | Ł7,866 | 6.4% |
| The above example is based on a male, investing Ł200 a month for 20 years, from 1 January 1985, with the policy maturing at age 65, with a return of fund death benefit. A CGNU Ł200 per month, 20 year with-profit pension policy maturing 01/01/04 produced a payout of Ł122,635 giving a reduction of 7.5% at 01/01/05, this is due to the different investment returns achieved during the individual term of the policy. | |||
Mortgage endowment policy – 25 years
| Company | Original target value of policy | Maturing policy value 01/01/05 | Including a final bonus of | Excess amount over target | Return before deducting inflation of 3.55% |
|---|---|---|---|---|---|
| CGNU (incl GA) | Ł28,779 | Ł52,576 | Ł16,065 | Ł23,797 | 8.9% |
| NULAP | Ł32,649 | Ł47,087 | Ł11,485 | Ł14,438 | 8.2% |
| CULAC | Ł31,013 | Ł54,130 | Ł10,826 | Ł23,117 | 9.1% |
| Provident Mutual | Ł30,688 | Ł40,452 | Ł7,295 | Ł9,764 | 7.2% |
| The above example is based on a male aged 29 investing Ł50 a month for 25 years with the policy starting on 1 January 1980. A CGNU 25 year Ł50 per month with-profit mortgage endowment policy maturing 01/01/04 delivered a payout of Ł59,444, giving a reduction of 11.5% at 01/01/05. 1.6% of the reduction is due to an increase in the cost of the extra life cover provided on mortgage endowments during these years. The remainder is as for a normal endowment and is due to the different investment returns achieved during the individual term of the policy. | |||||
Mortgage endowment policy – 15 years
| Company | Original target value of policy | Maturing policy value | Including a final bonus of | Shortfall to target | Return before deducting inflation of 2.7% |
|---|---|---|---|---|---|
| CGNU (incl GA) | Ł14,909 | Ł13,033 | Ł0 | Ł1,876 | 4.8% |
| NULAP | Ł15,443 | Ł13,126 | Ł1,327 | Ł2,317 | 4.8% |
| CULAC | Ł14,040 | Ł12,740 | Ł1,565 | Ł1,300 | 4.5% |
| Provident Mutual | Ł14,497 | Ł12,113 | Ł238 | Ł2,384 | 3.8% |
| The above example is based on a male aged 29 investing Ł50 a month for 15 years, with the policy starting on 1 January 1990. A CGNU 15 year Ł50 per month with-profit mortgage endowment policy maturing 01/01/04 delivered a payout of Ł13,715, giving a reduction of 5% at 01/01/05. This is due to the different investment returns achieved during the individual term of the policy. | |||||
Notes to Editors
Further examples of payouts for conventional and unitised policies over different terms are available on request.
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 (except on some maturity or death) which will reduce what you 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. Full written terms and conditions of Norwich Union products are available on request. Norwich Union is authorised and regulated by the Financial Services Authority and only advises on its own products.
Norwich Union is the UK’s largest insurer. It is a leading 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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