Aviva freezes with profits bonus levels

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Aviva, the UK’s largest life insurance and pensions
provider, has frozen – and, in some cases, cut – the
regular bonus rates on its with-profits policies, in spite of last year’s rebound in equity markets.

Releasing its annual withprofits statement this week, Aviva said regular bonus rates for unitised policies would be maintained at between 2 and 3.5 per cent.

However, some investors in Aviva’s former CGNU fund will see their regular bonuses fall from 1.5 per cent to 1 per cent, which Aviva said was in line with the “actual long-term performance of the fund”. Bonus rates for new
investors in the with-profits income fund have dropped from 3.25 per cent to
2.5 per cent.

There was mixed news for some conventional life and pensions policyholders – including those with endowment policies. Some final bonus rates were cut, but others were increased, depending on the year
in which the policy was taken out.

Final bonuses – which can compensate for poor regular bonuses – were increased slightly for unitised life and pensions policies.

Overall, Aviva’s with-
profits fund achieved 6 per cent growth in 2009. But analysts said that this performance did not compare favourably against other investments, which captured more of the 20 per cent rise in equity markets last year (see
table, right).

“In a year when the sun was shining on the UK stock market, Aviva has failed to make much hay for its with-profits investors,” said Laith Khalaf, pensions analyst with Hargreaves Lansdown, the independent financial advisers. “The fund’s performance was
disappointing.”

Between April and the end of the year, Aviva increased the combined UK and overseas equity weighting of its with-profits fund from 30 to 39 per cent. Property holdings accounted for another 18 per cent, UK fixed interest for 16 per cent, and UK corporate bonds for 13 per cent. Overseas bonds and cash made up the remainder.

“Returns of 6 per cent in 2009 are somewhat below where one would expect them to be following a strong recovery in equities, bonds and commodities,” said Adrian Lowcock, senior investment adviser with Bestinvest, the independent financial advisers.

Lowcock said Aviva’s bonus rate looked “low” when compared with Equitable Life, which last week awarded its with-profits pension policyholders a 3.5 per cent interim bonus and a 2 per cent one-off bonus.

However, Aviva insisted that it was delivering solid returns for its 2.1m with-profits investors, who are a mix of regular, mortgage and pension savers.

“I don’t accept that we have disappointed,” said David Barral, chief operating officer at Aviva. “The vast majority of customers who have invested in the Aviva with-profits funds have received higher returns than if they had invested in an average bank or building society account and have been protected against the full impact of volatile investment markets.”

Aviva said a customer who had invested £10,000 in its investment bond 10 years ago would today receive £14,956, compared with a return from typical savings account of £12,905.

“This is equivalent to 4.1 per cent a year, compared with 2.6 per cent from a typical savings account over the period,” said Barral.

Barral maintained that investors had benefited from the “smoothing” process used by with-profits policies, whereby returns in better performing years are held back and distributed in poorer years.

“You can’t compare
with-profits with short-term investments,” said Barral. “We are arguing that,
over the long term, the returns are very attractive compared with other
investments.”

But some advisers questioned whether with-profits were the best asset choice for long-term pension saving.

“Those who are still some way from retirement might find that being invested so conservatively means they miss out on the higher returns that have historically been associated with investing in equities,” said Khalaf.

Mortgage holders are also affected. Last year, 22,000 of Aviva’s mortgage endowment customers received an extra payment after it promised to top up shortfall. Only 4 per cent of mortgage endowment policies maturing in 2010 are “green” or will reach their target, said Aviva.

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