FRIENDS Provident yesterday cut payouts on its with-profits policies by up to 18 per cent in the second-biggest reduction in bonuses by an insurer this year.
The move will hit 25-year, £50-a-month, conventional with-profits endowments particularly hard. Such an endowment maturing this month will be worth just £42,072, compared with £51,283 a year ago.
Only Standard Life policyholders have endured a more punishing fall in policy values. This month the mutual revealed that payouts on its 25-year endowments would plummet 18.4 per cent to £49,511.
Norwich Union, Britain’s largest insurer, cut payouts on its 25-year, with-profits mortgage endowments by 10 per cent to £47,087.
Financial advisers blamed excessive bonuses in the 1990s and reduced competition on endowments for the dire bonus season.
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Clive Scott-Hopkins, director of Towry Law Financial Services, said: “Bonuses were really overpaid in the Nineties because companies were expecting investment conditions to continue to improve. They didn’t and now they’ve got to bring payouts back in line with policyholders’ asset share.”
He added: “There’s less competition on new endowment business so they’re not trying to attract new customers.”
Mr Scott-Hopkins also said that insurers’ heavy investment in gilts during the past few years meant that they were less likely to benefit from recent improvements in the stock market. The FTSE 100 topped 5,000 last week for the first time since May 2002.
Regular bonuses on Friends Provident’s unitised and conventional life and pensions products fell by less than one percentage point or remained the same compared with February last year, while final bonuses on some of these products increased. For example, final bonuses on ten-year, unitised, with-profits bonds jumped from 5 per cent to 12.5 per cent.
Brian Harrison, director of actuarial services at Friends Provident, said that as a former mutual, the insurer did not have a pool of orphan assets — money that was set aside to smooth the investments of people who have since cashed in their policies — with which to bolster its payouts as other insurers did.
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Mr Harrison said that the insurer continued to pay bonuses in 2001, even though it made a minus 8.7 per cent return on its investments, and in 2002, when it returned minus 8.9 per cent. It needed to reduce its payouts now to cover the costs.
Friends Provident made a 10.7 per cent return in 2004, its first year of double-digit growth since 1999.