Prudential cuts with-profits bonus rates

Prudential has bucked the trend among life insurance companies by announcing only modest cuts to payouts on its with-profits policies.

Total payouts this year will be between 6 and 10 per cent lower than last year, the insurer said on Tuesday.

A Prudential with-profits bond and personal pension now pays a yearly bonus of 3 per cent, down from 3.5 per cent last year. With-profits annuities now pay 2 per cent down from 2.75 per cent in 2008.

David Belsham, chief actuary at Prudential, argued that the rates still compared favourably to savings products, where interest rates have been slashed.

“If you look at base rates in relative terms the annual bonuses compared to interest rates are now relatively more attractive than last year,” he said.

Prudential said sales of its with-profits bond were strong last year, reporting a 139 per cent rise. Few other providers are still selling new with-profits policies.

Prudential also has a more lenient policy than rivals on penalties for early withdrawals from its funds. So-called market value reductions are applicable on a case by case basis, but once a policy has been in force for 5 years policyholders can withdraw £25,000 a year with no penalty – which covers many of the smaller policyholders in the fund.

The cuts are the latest in the season of with-profits announcements that began in January, but Prudential’s figures are notably stronger than its rivals.

This year, Legal & General announced cuts of up to 18 per cent, Friends Provident slashed payouts by up to 20 per cent and even Norwich Union, a relatively strong life insurer, cut payouts by as much as 15 per cent.

Analysts were unsurprised by Prudential’s modest cuts, pointing to its very strong inherited estate of £5.4bn. Such large reserves allow the actuaries to use some of the money to top up bonuses for investors leaving the with-profits fund.

Large reserves also allow insurance companies greater investment freedom over where they can invest their with-profits fund, according to rules laid down by the Financial Services Authority.

The Prudential with-profits fund has about 50 per cent in equities, compared with 30-40 per cent from rivals. Equitable Life, the failed with-profits provider, has about 5-10 per cent in equities.

Prudential’s with-profits fund has returned 67.2 per cent over the past 10 years compared with a rise of 12.4 per cent on the FTSE All-Share over the same period.