February 4, 2011 12:17 pm

Aviva freezes with-profits bonus rates

Two million Aviva with-profits policyholders will have their annual bonuses frozen but will benefit from a rise in final bonus rates, following a 12 per cent increase in the value of its main fund in 2010.

The regular bonus rate for Aviva’s new business bonds will remain at 2.75 per cent and the regular bonus rate for new pensions will also stay at 3.25 per cent. Regular bonus rates for conventional policies, including endowments will stay at 2010 rates. Market value reductions (MVRs) on with-profits policies will fall by an average of 4 per cent.

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The news came alongside reports that the main Aviva with-profits fund grew by around 12 per cent in 2010 while the total value of all the providers’ with-profits funds reached £49bn.

David Barral, Aviva chief operating officer, said the insurer had increased investment in equities to around two-thirds of the fund, despite experiencing two bear markets in the past decade.

“Aviva’s with-profits investors have enjoyed good returns over 2010 and our funds continue to deliver steady returns for cautious investors,” he said. “We’ve increased unitised final bonus rates, reduced MVRs and a 10-year bond with the no-MVR guarantee gives an annual return of 3.9 per cent, outperforming average savings accounts.”

A saver who had invested £10,000 in an Aviva investment bond on 1 January 2006 would have seen a total return over five years of 16.7 per cent, or 3.1 per cent per annum.

However, the provider also said that 93 per cent of mortgage endowment policy holders’ investments had not grown enough to cover the cost off their mortgages. Only 3 per cent of the company’s endowment customers are on track to cover the cost of their mortgages from with-profits investment returns.

Advisers said that after a strong year for investment markets it would have been disappointing if Aviva had cut their annual bonus rates. Patrick Connolly at AWD Chase de Vere, said: “Thankfully annual bonus rates have been maintained at current levels, which is probably the best that investors could have hoped for.”

However, he said he was disapointed that despite strong underlying performance some payouts were cut from last year. “It seems that, almost regardless of investment performance, with-profits funds are still paying for mistakes they have made in the past. We can expect further reductions in bonus rates and payouts in the coming years,” he said.

Aviva’s two million with-profit customers are made up of 500,000 with-profit bondholders, 900,000 with-profits pensions and 600,000 endowment policies.

Mr Connolly said however that Aviva’s with-profits investors are in a much stronger position than with-profits policyholders with many other companies

“The stronger providers such as Aviva, and Prudential and Legal & General who will be announcing in the coming weeks, are still investing in growth assets, paying bonuses and making reasonably competitive payouts,” said Mr Connolly.

“When deciding whether to keep an existing with-profits policy, the financial strength and future prospects of the product provider should be a major consideration and Aviva is certainly one of the better providers.”

Earlier this week Standard Life said it was cutting or freezing its with-profits bonus rates despite most policies increasing in value since last year.

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