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Life offices scrap their pledges on bond MVAs

Leading life offices have ditched their guarantees not to apply a market value adjuster on the 10th anniversary of their with-profit bonds due to fears they cannot afford to back them financially.

The life offices dropping the guarantee include Royal & Sun Alliance and Scottish Mutual, with industry experts predicting this could set a trend.

Royal & Sun Alliance says the cost of reserving for the guarantee was having an impact on its with-profits bonus rate. It scrapped the guarantees rather than see the WP bonus rate fall below 5 per cent.

It predicts other life offices will have to adopt the same policy as the economic climate squeezes bonus rates further. The life office was spurred on after the Faculty and Institute of Actuaries voiced its concerns about the marketing of with-profits bonds, as revealed in Money Marketing in July.

Scottish Mutual says it made the move after research which revealed rivals were abandoning their guarantees. Spokeswoman Christine McAllister says: “Our primary concern is to be competitive and that includes in terms of bonus rates.”

Royal & Sun Alliance personal business market leader Mark Edwards says: “We are in the stakeholder environment and bonus rates are going down. We have to reserve accordingly.”

Cazalet Financial Consulting analyst Ned Cazalet says: “Once one life office drops its guarantees, the others are likely to follow.”

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