John Lister, chief actuary, Norwich Union Life, said: "Following the increases in regular bonus rates on some products announced in 2005, an excellent investment return and a strong fund have enabled us to increase most final bonus rates and deliver good policyholder returns.
- Very strong performance from property and equity markets enabled CGNU with-profit fund to achieve an overall return of 17.7% before tax
- Regular bonus rates held with some increasing (announced on 14.12.05) – following the increase in some regular bonus rates in July 2005
- Most final bonus rates increased
- Bonuses totalling £1.1 billion added during 2005 for around 2.8 million with-profits policies
- Market value reductions (MVRs) reduced from 1.1.06 following four cuts in 2005. Money invested in 2001 no longer subject to MVRs
- Policy payouts continue to be competitive:
- Cash-in value for a £10,000 lump sum 10-year bond is £16,797, giving a return of 5.3% p.a., £3,871 above inflation
- A 25-year £50 a month mortgage endowment maturing in 2006 will pay £50,295 - 66% (£19,927) over the target amount of £30,368 and gives a return of 8.6% p.a.
- A 20-year £200 a month pension maturing in 2006 will pay £110,387 – a return of 7.7% p.a.
Figures for investment and policy returns relate to the CGNU with-profit fund only. Returns quoted assume the policies mature on 1 January 2006. Endowment example is for a 29 year old male at the outset of the policy.
John Lister, chief actuary, Norwich Union Life, said:
"Following the increases in regular bonus rates on some products announced in 2005, an excellent investment return and a strong fund have enabled us to increase most final bonus rates and deliver good policyholder returns.
"The strength of the fund allows us to have a high proportion of policyholders' money invested in shares and property, which has clearly benefited policyholders in providing the near 18% return. It also allows us to offer our customers valuable guarantees."
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Contents
1) The economic and investment background affecting with-profits policies
2) The investment returns on the with-profit funds
3) How the with-profit funds invest policyholders' money
4) How returns on with-profits policies compare to other types of investments
5) Regular bonus rates for policyholders for 2006
6) Payout values for policyholders for 2006
7) Changes to cash-in values for unitised policies (known as MVR rates)
8) Payout examples for conventional policies in 2006
9) Mortgage endowments – facts and figures
1) The economic and investment background affecting with-profits policies
The UK economy has seen growth over the last year largely as a result of strong merger and acquisition activity and buoyant corporate earnings. Rising oil prices also gave a boost to the FTSE All-Share index. Later in the year mortgage approvals and house sales began to rise and retail sales recovered from their low point. The US economy, which acts as a barometer to the world economy, has also demonstrated growth over the last year, supported by the continuing strength of US consumer demand and the vibrant US housing market.
UK equities showed strong growth in 2005 with medium-sized companies delivering the best share price performance. Over the year, general retailers struggled as fears of a spending slowdown on the high street proved to be correct. Pharmaceuticals did well at the end of the year as institutional investors were concerned by rising inflationary pressures and slowing economic growth in the UK. The generally positive trend that has been in place for some time in the commercial property market continued during 2005. This led to returns in these sectors of around 20%.
Given the strong performance of equity markets in 2005 we have lower return expectations for the next 12-18 months. We anticipate returns of 5 to 10% for equities and property in 2006.
The chart below tracks the FTSE 100 index over the years 2000 to 2005. It shows the substantial recovery from the low point in March 2003 but also that it still remains 19% below the peak level achieved at the end of 1999.
2) The investment returns on the with-profits funds
We have seen another year of positive returns on the CGNU and CULAC with-profit funds, with a return in 2005 of 17.7% before tax. The comparable returns in 2004 and 2003 were 11.6% and 12.1% respectively (all before tax). The return on the NULAP with-profit fund was 16% before tax, while the return on the Provident Mutual (PM) fund was 10.6% before tax. The PM figure reflects the higher proportion of assets invested in fixed interest investments. For those PM endowment policyholders who opted during 2005 to switch future investment returns to the CGNU with-profit fund, the return was 15.5% before tax.
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) How the with-profit funds invest policyholders' money
Investments of the CGNU with-profit fund at the end of 2005
| Investment type | % at the end of 2005 | % at the end of 2004 | % at the end of 2003 |
|---|---|---|---|
| UK shares | 41.3 | 42.9 | 41.4 |
| International shares | 13.1 | 8 | 9.3 |
| Property | 18 | 16 | 14.5 |
| UK fixed Interest/bonds | 19.4 | 24 | 26.1 |
| International bonds | 2.9 | 3.7 | 4.4 |
| Cash | 5.3 | 5.4 | 4.3 |
| The equity backing ratio (proportion in shares & property) increased from 67% at the start of 2005 to 72% at the end of the year. A significant EBR is important for long-term performance. The equity backing ratio of the CULAC fund is 72%, the NULAP fund is 60% and the Provident Mutual fund is 14.5%. | |||
4) How returns on with-profits policies compare to other types of investments
Investment bond – 10 years
| Original Investment | Value of investment after 10 years | % Return before inflation of 2.6% p.a | % p.a. real return | |
|---|---|---|---|---|
| CGNU (Incl.GA) with-profit bond | £10,000 | £16,797 | 5.3 | 2.7 |
| CULAC with-profit bond | £10,000 | £16,654 | 5.2 | 2.6 |
| NULAP with-profit bond | £10,000 | £16,869 | 5.4 | 2.8 |
| NULAP balanced managed unit-linked fund | £10,000 | £16,681 | 5.3 | 2.7 |
| NULAP Equity unit-linked fund | £10,000 | £17,920 | 6.0 | 3.4 |
| Bank/building society savings account | £10,000 | £13,917 | 3.4 | 0.8 |
| Examples based on a £10,000 single investment made on 1 January 1996. The original investment plus Retail Price Index (RPI) would be £12,926. Returns are quoted net of basic rate tax. Short term returns: Short term returns continue to improve. For example, a year ago, a with-profit bond (taken out on 1 January 2000) after five years returned £10,173, just above the original investment. A year on, the progress in market recovery means that a bond (taken out on 1 January 2001) returns £11,767 showing a real return over inflation of 1% p.a. If invested in a building society over the five years from 1 January 2001 the value would have been £11,290, just in line with inflation. Figures above are an illustration of the return over the last 5 years. However, it should be remembered that with-profits is a long-term investment. 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 £2,500 to £25,000. 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
| Original Investment | Value of investment after 20 years | % Return before inflation of 3.0% p.a | % p.a. real return | |
|---|---|---|---|---|
| CGNU (incl. GA) with- profit pension | £200 a month | £110,387 | 7.7 | 4.7 |
| CULAC with-profit pension | £200 a month | £116,128 | 8.1 | 5.1 |
| NULAP with-profit pension | £200 a month | £108,298 | 7.5 | 4.5 |
| Provident Mutual with-profit pension> | £200 a month | £89,272 | 5.8 | 2.8 |
| NULAP UK balanced managed unit-linked fund | £200 a month | £103,022 | 7.1 | 4.1 |
| NULAP UK Equity unit-linked fund | £200 a month | £107,959 | 7.5 | 4.5 |
| Examples based on a £200 per month investment started on 1 January 1986. In most cases the effective with-profits policy return is higher than shown above as policyholders have the right to a valuable guaranteed annuity rate. | ||||
5) Regular bonus rates for policyholders for 2006
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.
- Regular bonus rates have been held, with some increased
- Explicit charged unitised policies: Life/investment policies 4.25%. Pensions 4.5% (increased from 4.0%), stakeholder pensions 4.0% (increased from 3.5%). For Norwich Union International Limited (NUIL) Offshore bonds 5.0% sterling or 4.75% (euro/$) unaltered. (These rates were announced on 14.12.05.)
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 policies unaltered at 2%. All CULAC policies no change at 3.25% (increased from 2.5 % from July 2005). CGNU policies taken out before October 1998, no change at 3.25% (increased from 2.5% from July 2005). CGNU policies taken out from October 1998 unaltered at 2%.
- Implicit charged pensions: NULAP policies 3% unaltered. CGNU/CULAC policies remain at 3.5% (increased from 3% July 2005). In some instances a 4% minimum bonus rate applies.
Implicit charged products mean 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 a regular 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 the amount paid out reflects what the policyholder's investment is actually worth, subject to smoothing.
Life, investment and pension policies for CGNU,CULAC, NULAP and PM policies, no changes to regular bonus rates. Regular bonus rates on the main policies range from 0% to 2%. These 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 2006
Unitised policies: All policy values have increased during 2005. Final bonus rates have also been increased except where an MVR is applied where the final bonus rate is 0%.
Examples of how policy values have increased during 2005:
15 year bond
| Cash-in value 01/01/05 | Cash-in value 01/01/06 | Increase in value during 2005 | Increase % | |
|---|---|---|---|---|
| CGNU (incl. GA) | £26,415 | £29,552 | £3,137 | 12 |
| NULAP | £24,385 | £26,665 | £2,280 | 9 |
| The example above is based on a £10,000 single contribution on 1 January 1991, for a male aged under 75 at the outset and shows the change in policy value during 2005. | ||||
15 year pension
| *Unit value 01/01/05 | Maturity value 01/01/06 | Increase in value during 2005 | **Increase % | |
|---|---|---|---|---|
| CGNU (incl. GA) | £51,694 | £60,334 | £8,640 | 17 |
| CULAC | £49,664 | £57,643 | £7,979 | 16 |
| NULAP | £50,881 | £58,493 | £7,612 | 15 |
| * If transferred an MVR may apply | ||||
Conventional policies: Life, investment and pension policies – for all Norwich Union companies: Nearly all policy values have increased during 2005. Final bonus rates are being increased except where the level of guarantees mean no final bonus has yet been earned.
In general, shorter-term policies show increases or small decreases compared to equivalent policies maturing a year ago, while those with a term of 20 and 25 years will generally be lower.
Payouts on longer-term endowments for example are likely to continue to reduce. This is because our expectation of future investment returns has reduced compared to those historically earned. Payouts reflect the investment earnings during the period a policy is actually held and invested together with the level of smoothing applied at the maturity date. As policies are held over different investment periods then payouts will differ. This is why payouts on a 25 year policy for example are likely to continue to reduce even in years with positive investment returns.
What is important to a policyholder is the value added on their policy rather than a comparison with the benefit they would have got if they had invested over a different period.
For example, a CGNU 25 year savings endowment policy has seen a 9% reduction in payout compared to a year ago. However, if you compare the surrender value of this policy a year ago with the maturity value now, there has been a 12% increase in policy value over the year, after taking account of the further premiums paid.
7) 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 and in the case of 2001 monies removed completely. 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. Average MVR rates for money invested in a specific year are;
| Year money invested | New MVR at 01/01/06 % | MVR at 06/10/05 % | MVR at Jan 2005 % |
|---|---|---|---|
| 1998 | 3 | 4 | 12 |
| 1999 | 6 | 8 | 17 |
| 2000 | 8 | 11 | 18 |
| 2001 | 0 | 2 | 8 |
| 2002 | 0 | 0 | 2 |
The higher MVR rates reflect money invested when the stock market was around its peak.
John Lister, chief actuary, said: "We have consistently reviewed and managed down the level of MVRs throughout 2005 to reflect the continuing improvement in the stock market. Our policy is to remove MVRs as soon as market conditions allow."
8) Payout examples for conventional policies in 2006
Pension – 20 years
| Company | Maturity value 01/01/06 | Including a final bonus of | Return p.a. before deducting inflation of 3.0% p.a. | % p.a. real return |
|---|---|---|---|---|
| CGNU (incl GA) | £110,387 | £1,295 | 7.7 | 4.7 |
| CULAC | £116,128 | £11,508 | 8.1 | 5.1 |
| NULAP | £108,298 | £2,844 | 7.5 | 4.5 |
| Provident Mutual | £89,272 | £2,792 | 5.8 | 2.8 |
| The above example is based on a male, investing £200 a month for 20 years, from 1 January 1986, with the policy maturing at age 65, with a return of fund death benefit. A CGNU £200 a month with-profit pension policy taken out 01.01.85, maturing 1.1.05 produced a payout of £113,392 giving a reduction of 3% at 1.1.06. In most cases the effective with-profits policy return is higher than shown above as policy holders have the right to a valuable guaranteed annuity rate. | ||||
Savings endowment policy – 25 years
| Company | Maturity value 01/01/06 | Including a final bonus of | Return before deducting inflation of 3.4% | % p.a. real return |
|---|---|---|---|---|
| CGNU (incl GA) | £51,927 | £12,588 | 8.8% | 5.4 |
| CULAC | £51,111 | £8,871 | 8.7% | 5.3 |
| NULAP | £46,652 | £13,115 | 8.1% | 4.7 |
| Provident Mutual | £38,061 | £6,077 | 6.8% | 3.4 |
| The above example is based on a male aged 29 investing £50 a month for 25 years with the policy starting on 1 January 1981, with a policy maturing at age 65, with a return of fund death benefit. A CGNU £50 a month with-profit savings endowment policy maturing at 1.1.05 produced a payout of £57,279 giving a reduction of 9% at 1.1.06. | ||||
Savings endowment policy – 15 years
| Company | Maturity value 01/01/06 | Including a final bonus of | Return before deducting inflation of 2.6% | % p.a. real return |
|---|---|---|---|---|
| CGNU (incl GA) | £12,594 | £0 | 4.3% | 1.7 |
| CULAC | £12,179 | £0 | 3.9% | 1.3 |
| NULAP | £13,478 | £2,218 | 5.2% | 2.6 |
| Provident Mutual | £12,394 | £1,023 | 4.1% | 1.5 |
| The above example is based on a male aged 29 investing £50 a month for 15 years with the policy starting on 1 January 1991. A CGNU £50 a month with-profit savings endowment policy maturing 01/01/05 produced a payout of £13,214, giving a reduction of 5% at 1/01/06. | ||||
9) Mortgage endowments – facts and figures
Mortgage endowment policy – 25 years
| Company | Original target value of policy | Maturing policy value 01/01/06 | Excess amount over target | Return before inflation of 3.4% | % p.a. real return |
|---|---|---|---|---|---|
| CGNU (incl GA) | £30,368 | £50,295 | £19,927 | 8.6% | 5.2 |
| CULAC | £31,013 | £48,889 | £17,876 | 8.4% | 5.0 |
| NULAP | £32,649 | £45,338 | £12,689 | 7.9% | 4.5 |
| Provident Mutual | £33,425 | £37,197 | £3,772 | 6.6% | 3.2 |
| The above example is based on a male aged 29 investing £50 a month for 25 years with the policy starting on 1 January 1981. A CGNU 25 year £50 a month with-profits mortgage endowment policy maturing 1.1.05 delivered a payout of £52,576 a reduction of 4% at 1.1.06. | |||||
Mortgage endowment policy – 15 years
| Company | Original target value of policy | Maturing policy value 01/01/06 | *Shortfall over target | Return before inflation of 2.6% | % p.a. real return |
|---|---|---|---|---|---|
| CGNU (incl GA) | £14,909 | £12,424 | £2,485 | 4.2% | 1.6 |
| CULAC | £14,040 | £11,858 | £2,182 | 3.6% | 1.0 |
| NULAP | £15,443 | £13,354 | £2,089 | 5.1% | 2.5 |
| Provident Mutual | £14,497 | £12,340 | £2,157 | 4.1% | 1.5 |
| *Shortfall before the impact of any "6% promise" payment. | |||||
Mortgage endowment shortfall status. Statistics for the latest full mailing undertaken by Norwich Union in 2005 show the following status: 7 % of policies on green, 21% of policies on amber and red 72%.
Note:
For CGNU and CULAC where we show 4%, 6% and 8% projection rates: green is less than 6% required growth, amber is 6-8% and red more than 8%. For NULAP where we show 4%, 5% and 6% projection rates: green is less than 5% required growth, red is more than 5%. For PM where we show 3.5%, 4% and 4.5%; green is less than 4% required growth, red is more than 4%.
Mortgage endowment promise: 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 the 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.
The company has already committed around £1 billion of capital for future endowment shortfall assistance – underlining the strength of our with-profit funds. Norwich Union believes that its mortgage endowment promise remains fully 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.
Time-barring of mortgage endowment complaints: Norwich Union began writing to customers in April 2005 confirming that a time bar would be applied for mortgage endowment complaints. The first date that a mortgage endowment complaint will become time barred will be April 2006. Norwich Union is giving at least 12 months notice of its intention to time bar complaints – double the six months notice required by the FSA. In addition to the 12 month notice we will be reminding our customers of the date of the time bar, three months before the effective date.
Mortgage endowment letters: Norwich Union has radically redesigned its mortgage endowment letter to make it even more clear to customers where they have a shortfall and that they must take action. The letter also very clearly states if a time bar is applicable on their mortgage endowment policy. The new letter will start being issued in 2006.
ENDS
Notes to Editors
Norwich Union has approximately 2.8 million with-profit customers of which 1.1 million are endowments, 1.1 million are pensions and 0.6 million are investment bonds. At the end of June 2005, the total of Norwich Union's with-profit funds was approximately £63 billion. (CGNU £16 billion, CULAC £16 billion, NULAP £28 billion, PM £3 billion), up from £57 billion a year before.
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 maturities 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 advises only 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 The Royal Bank of Scotland Group and Cooperative Insurance Society. Norwich Union's news releases and a selection of images are available from Aviva's internet press centre at www.aviva.com/media