Norwich Union is to cross-subsidise a 5.75 per cent bonus rate on its with-profits stakeholder plan with funds from its traditional with-profits fund if the stakeholder version should underperform.
Existing with-profits policyholders will not receive any reward for funding the returns but NU believes the chance of having to make a payout is slim.
Industry sources attacked the creation of a product where one group of policyholders subsidises another, claiming that it is unfair on existing policyholders. They have also underlined concerns over whether it is possible to make a profit out of stakeholder.
But NU insists that if it is successful in selling stakeholder then existing with-profits policyholders will benefit from being part of a bigger company.
It also insists that if equity returns are small it can reduce its bonus rates and introduce market value adjusters.
Norwich Union risk actuary Tim Horn says: “If we become a major provider for stakeholder, we enhance the brand and the benefit for the existing fund is that costs would reduce. There is a cost in guaranteeing the returns on the other fund but it is offset by being a bigger player.”
But IFAs are not convinced of benefits to existing policyholders.
Torquil Clark pensions development manager Tom McPhail says: “If I had an endowment with Norwich Union, would that make me happy? No. I cannot help thinking that Norwich Union is digging itself a hole with this.”
Skandia Life head of pensions marketing Peter Jordan says: “This tends to confirm that stakeholder pensions will not be self-funding.
“It is a shame that the most important piece of pension legislation has created a range of products which cannot break even.”