Standard Life cuts customer bonuses
Standard Life has become the latest with-profit player to slash final bonuses and extend exit fees in a move that means most policyholders will see a fall in the value of their plans.
The insurer has reduced bonuses with immediate effect as a result of significant falls in the equity markets since August. It has also increased exit fees - known as market value reductions (MVRs) - and extended these fees to include more of its with-profits plans. Around two million customers will be affected.
Margaret Flaherty, communications manager for with-profits funds at Standard Life, says some single premium pension policyholders face the biggest penalties of 30%.
She adds: "The changes that we have made will ensure that we maintain fairness between planholders who choose to leave with-profits, and those who remain invested until their plan maturity or retirement date.”
Earlier in October, Norwich Union revealed it will charge its with-profit customers “hefty” exit fees of up to 22% to stop them redeeming their investments.
Over one million Norwich Union policyholders who have unitised with-profits policies will now have to pay a MVR of between 13% and 22%, depending on the year they purchased the units (see table below), if they wish to make a partial or total withdrawal from the CULAC and NULAP funds.
John Lister, chief actuary at Norwich Union, says turmoil in the equity markets, as well as falling commercial property and corporate bond values, have taken their toil on the performance of with-profit funds but the introduction of MVRs is designed to protect all policyholders
“MVRs are a mechanism to ensure that those policyholders leaving or wishing to take money out of the fund do not take more than their fair share of the fund at the expense of those policyholders who remain,” he explains.
“This measure reflects our prudent management of the fund in extreme market conditions ensuring that all of our with-profit customers are treated fairly and to ultimately protect the funds in times of market turbulence.”
However, the introduction of these fees will anger some investors wishing to leave the funds.
Andy Cowan, head of private client at financial planning firm Towry Law, says: “The introduction of hefty MVR penalties is firm evidence that investors cannot rely on with-profits funds to smooth investment returns.
“Many investors may now feel trapped in their with-profits funds, facing limited growth prospects if they stay but significant exit penalties if they wish to leave.”
Standard Life and Norwich Union are taking a short-term view by cutting bonuses - to the detriment of the investor, says Sharon Bratley, chartered financial planner at Fairinvestment.co.uk.
"Although the rationale behind with-profits is that it is supposed to smooth the peaks and troughs of equity investment for investors, over the long- term, there never appears to be a good time for people to withdraw their money or for their policy to mature," she explains. "Whilst the market is rising, with-profit policyholders don't feel any benefit until bonus rates actually rise and this could be many months or potentially years, and in practice with-profit investors miss out on some of the most significant growth in the market.
"Where exactly are the reserves that the insurance companies are supposed to have built up in order to cushion investors from short term dips in the market?"
|Year units |
|Average MVR rate|
|1996 - 1999 /|
2004 - 2006
|Source: Norwich Union |
The decision to introduce exits fees comes after Norwich Union decided to offer its investors cash payments of £1,000 in return for them agreeing to give up their rights to any payouts from the inherited estates – a reattribution deal that was criticised by some as “bad value”.
And in September, Norwich Union slashed final bonus payouts to its 2.4 million with-profit policyholders by up to 10%, as a result of “poor investment conditions”. Friends Provident has also slashed final bonuses.
Nick McBreen, an IFA at Worldwide Financial Planning, says policyholders need to take a long, hard look at their investment profile and seriously consider whether they still want to be in with-profits – even if it means they have to fork out for an exit fee.
“Policyholders can expect poor bonus rates going forward, a poor deal from the reattribution, and at a time when the marketplace is suffering one of its worst ever downturns,” he explains. “For some policyholders, there is very little reason to stay in with-profits.”
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Not to be confused with an early repayment charge (ERC). Exit fees are levied on top of ERCs, which are a method of clawing back lost interest on a loan repaid early. By contrast, exit fees are charged for the administrative work this entails. They are charged as flat fees, from £150 to £300. However, in January 2007, following mortgage lenders surreptitiously raising fees sometimes by fivefold, the Financial Services Authority (FSA) intervened and most mortgage lenders removed exit fees from new mortgages. If you paid exit fees on your mortgage before January 2007, you may be able to claim them back.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.