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Bonus of contention

The recent bonus cuts from Equitable Life came as

little surprise to most of the industry which has been well aware of the company&#39s inflated payout policy which has left it with no reserves.

Throughout Equitable&#39s demise, there have been cries from other with-profits life offices about its unsustainable bonus rates.

But when companies

the size of Norwich Union, Scottish Widows and Abbey National-owned Scottish Mutual are slashing bonuses halfway through the year, yet more questions must be raised about with-profits business.

ScotMut, which offers some of the highest bonus rates in the market, has cut reversionary bonuses on unitised with-profits pension products by 0.5 per cent to 5.5 per cent.

Reversionary bonuses

on life products will come down by 0.5 per cent to 4.75 per cent while terminal bonuses have also been cut from 2 per cent to 1 per cent across all with-profits contracts.

NU is cutting terminal bonuses by up to 5 per cent and Scottish Widows has cut reversionary bon-uses on unitised with-profits by 0.5 per cent and terminal bonuses by up to 6 per cent.

Widows last reduced reversionary bonuses in January 1999. The woes of the stockmarket are being used by companies as the explanation behind the cuts.

ScotMut spokeswoman Christine McAllister says: “It is our practice to rev-

iew bonuses twice-yearly. Extreme stockmarket falls have got to affect bon-

uses and we have concluded that they have to be reduced.”

ScotMut moved around £600,000 out of equities into cash and bonds. Prudential switched from equities into corporate bonds last year and has reaped the benefits. More companies could follow a similar path.

NU says the stockmarket falls have been so extreme that it is outside the limits where it can smooth out returns.

It admits its fund is down by 7 per cent against hopes of returning 7.25 per cent which it forecast at the start of the year.

Senior actuary David Riddington says: “With-profits is not immune to the stockmarket. We manage the fund between what is earned and what is paid

out. When the returns fall outside our criteria, we have to take action. This is not a knee-jerk reaction, it is about managing ourfund properly.

“There is a limit to how much you can smooth returns. When you go beyond those limits, you have to make adjustments. Reducing bonuses is about maintaining the relationship between what is paid out and what is earned.”

Cazalet Financial Consulting principal Ned Cazalet says: “Some companies have competed aggressively on the basis of headline reversionary bonuses. Some have been absurdly high and so companies are having to bring them back in line because they do not stack up.

“Bonuses have to be reserved for and the financial strength of life offices has decreased dramatically over the past year. Bonuses come from the excess capital

of life offices. This has fallen, which diminishes the scope for paying bonuses and smoothing.”

Many in the industry agree that, given this environment, lower bonus rates are not surprising and they predict that rates will continue to fall as we head in to an environment of lower investment returns.

But bonuses are still being paid. In comparison, the average 12-month returns on unit trusts were down by nearly 17 per cent last week.

In this context, with-profits offering positive returns can be difficult to castigate but only if life offices are transparent about the management of the fund and their actions.

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