Standard Life freezes bonuses

David Burrows

Jan 27th 2010

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Standard Life has frozen annual bonus rates for its 1.5million with-profits policyholders but in response to 2009's stock market recovery, it has decided to trim back some of its market value reductions (MVRs) on exiting investors.

Standard Life has fixed the bonus rate of its with-profits bonds at 2.5%, 1.5% for unitised life plans and 2% for unitised with- profits pensions.

The bonus rate on conventional with-profits plans have also stuck at 0.25% on the sum assured of life policies and 0.35% on the bonus.

The life company (headquartered in Edinburgh, pictured) has also cut the MVRs, effectively exit penalties, on some with profits policies.

The average MVR on unitised pensions has fallen to 4.4% from 7%, however on with-profits bond it remains unchanged at 7%.

Mixed performance

Standard Life's investments on behalf of its 1.5 million policyholders ranged from 3.6% to 19.2% returns last year which compares with a 20.3% growth in the FTSE 100.

Unitised savings policies, which invest heavily in fixed interest stocks were the weakest performers at 3-4% .
With-profits bond holders benefited from an 8.6% return while stakeholder policies bought since the insurer demutualised and are 60% invested in equities achieved just over 19%.

MVR pruning

Standard Life insisted that its decision to trim back on MVRs meant fewer unitised with-profits plans now have MVRs.and, where MVRs remained, they were generally smaller than before.

Margaret Flaherty, Standard Life's with-profits communications manager, said: "We are pleased to say that most customers will see a year-on-year increase in the value of their plan.

"Plan values depend on investment returns on the assets in the with-profits fund. While returns from equity markets have improved they are still some way off recovering from the preceding downturn. Other classes of investment such as fixed interest and property delivered lower returns in 2009 than equities.

"Despite this many with-profits investments have outperformed regular savings in a building society, with a 25 year savings endowment providing a return of £28,139 compared with £20,799".

Exit strategy

Jason Whitcombe IFA with Evolve Financial Planning argues the MVR reduction is more important than the annual bonus freeze.

"Our experience is that most people who have with profits policies are trying to get out of them, in favour of more transparent funds. For such people, the reduction in the MVR rates will be more important than the annual bonus rate decision.

Whitcombe added: "The trouble with such funds is their opacity. Decisions about annual bonuses, terminal bonuses and MVRs are completely at the insurance companies' discretion.

"As most insurance companies aren't heavily marketing such funds, they don't need to offer spectacular bonus rates to attract new business.

"Therefore, to the average investor, it feels like insurance companies are trying to pay out as little as they can get away with.
"In fact, where investors are faced with heavy MVRs, they are effectively trapped so insurers can get away with paying out very little indeed in the knowledge that investors will find it difficult to exit the fund and crystallize the MVR."