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NU makes emergency cuts

Norwich Union is devaluing all with-profits policies by 5 per cent and slashing bonuses in an emergency measure blamed on falling stockmarkets.

The changes, which take effect from August 1, mean terminal bonuses will be cut by whatever amount necessary to meet the 5 per cent overall cut. Some terminal bonuses will be wiped out altogether. Reversionary bonuses will be cut by 0.5 per cent across the board.

The payout on a 10-year pension with a £200 monthly premium will be £33,744 compared with £35,100 at the beginning of the year. The payout on a 25-year endowment with a £50 monthly premium will fall to £85,518 from £89,787.

NU says the returns of its with-profits funds are -8.3 per cent compared with an assumption when it set bonuses earlier this year of +7.25 per cent.

The company says it is paying out 122 per cent of policy earnings and cutting terminal bonuses will bring it closer to its guideline of not paying out over 110 per cent under normal conditions. Industry pundits have been warning that payout levels are unsustainable and eroding capital. The current market value reduction of 12 per cent will be reviewed when the cuts take effect.

NU senior actuary David Riddlington says: “Inevitably, there will be more cuts if things do not improve and inevitably the mortgage endowment projections are going to be worse. This is not a panic measure, we are just managing our with-profits funds prudently.”

Cazalet Financial Consulting principal Ned Cazalet says: “This is just the beginning. I am surprised that the cut is so low and I think they and pretty much all other companies are going to have to make more cuts – you cannot defy gravity. But you are still better off in with-profits than unit-linked.”

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