With-profits policyholders

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Norwich Union has been withholding some cash from its with-profits customers since May 1 2004. The current rate is 0.75 per cent a year, although little publicity has been given to this new charge because the money doesn’t come directly from customers’ bonus payments. Rather, it is taken from the “asset share” in the pooled fund before it is divided up to give out annual bonuses.

One FT reader is unhappy with this practice, and asks what gives NU the right to do it. He writes: “I have been struggling to get a straight answer from NU to the relatively simple question – which provision of my policy or the Regulations of the Society authorises the making of this charge? I’ve put the question to them three times and three times they have declined to answer it. All they have been willing to tell me is why they are making the charge.”

The “why” is that NU wants more cash to boost capital reserves. NU’s chief actuary, John Lister, says: “This charge is in the interest of policyholders to enable us to run a high-equity content in the fund and give better returns. If we didn’t make the charge we’d have to reduce the equity in the fund.”

So it’s a strategy of paying a little now in the hope of getting a lot more back in the long-term.

The UK’s largest insurer needs to generate lots of extra money to pay for the generous promises that it, like many other life companies, made to with-profits customers in the past. Now it has to pay for them in an era of low inflation and low returns.

Our reader is one of the “lucky” ones with a guaranteed annuity rate (GAR) contract. These people should get a pension income that’s far more advantageous than those offered on the open market. As an example, Lister says that some GAR contracts assume that government bonds (gilts) will be paying out 9 per cent a year – the current rate is 5 per cent. The insurer has to make up the difference between the market rate and the guarantee.

And what gives NU the right to impose this charge? Lister says he is happy to give our reader a personal response about his own contract, but makes a general comment that the insurer got approval from the Financial Services Authority (FSA) and took legal advice before going ahead with the charge.

Beleaguered with-profits holders will hope that NU will one day find it has raised too much cash through the 0.75 per cent asset share charge. It plans eventually to return any profit to policyholders.

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