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ROYAL LONDON AND SCOTTISH LIFE BONUS ANNOUNCEMENTS - Monday, March 01, 2004
- Royal London Group allocates £287 million in with profits bonuses
- Regular bonuses on Royal London unitised with profits policies maintained or increased
- Maturing policies continue to deliver very satisfactory real rates of return
- Only the second revision in 2 years for Royal London bonus rates (and third revision in 2 years for Scottish Life bonus rates)
Royal London, the mutual insurer, has today announced bonuses on with profits policies marketed through Royal London and through Scottish Life, part of the IFA division of Royal London Group. New business through Scottish Life is written in the main Royal London With Profits fund. Scottish Life with profits business written prior to 1 July 2001 (the date that Scottish Life was acquired by Royal London) is in the ring-fenced Scottish Life Fund.
During 2003 the Royal London With Profits fund recorded a return of 7.7% (before tax) reflecting a much better year for equity markets. This positive investment performance has, in turn, been reflected in the asset shares used to calculate with profit policyholder benefits (see “Bonus Terms Explained” in the “Notes to Editors” below).
Despite a much improved year in equity markets, returns over a three year period are still negative overall. In the three years to 31 December 2003, the FT All Share Index reduced by 26%. Following a prolonged period of negative returns, conventional with profits policies still have values at maturity above their asset share and above the value of other equivalent types of investment. Bonuses – both annual and final – on conventional with profits policies need to be lowered to bring policy values more into line with actual asset shares. This action is necessary to ensure that all with profits policyholders continue to receive a fair share of the fund. This is a trend that we anticipate will continue across the industry over the next few years.
The recent improvement in the performance of the stockmarket can be seen more clearly in the bonuses allocated to unitised with profits policies. For all Royal London unitised with profits policies sold in the UK, regular bonus rates have been maintained and, in some cases, increased.
Commenting on the bonus announcement, Mike Yardley, Group Chief Executive of Royal London, said:
“The with profits concept continues to prove its worth, providing positive returns to policyholders through periods of good and bad stockmarket performance. For the individual investor in volatile investment markets, timing is everything. For example, a stockmarket investment at the start of 2002 would have fallen by almost 25% in capital terms over the course of the year. The same investment made at the start of 2003 would have appreciated by over 16% to the end of December.
“By smoothing the return through both good and bad, a with profits policy reduces the very real dangers of mistiming an investment decision. This is a very practical benefit for the typical individual investor, and is in danger of being ignored by some of the more vociferous critics of with profits products.”
The benefit of the smooth profile of returns from with profits policies is clear from the following:
- A Royal London 25-year with profits saving plan has returned 11.5% a year after tax – a real return of 7.4% a year.
- A Scottish Life 20-year regular premium personal pension has returned 11% a year – a real return of 7.6% a year.
By comparison, regular savings in a higher rate bank or building society account would have generated an annual yield of only around 5% before tax – a real return of less than 1% a year.
Mike Yardley added: “The real measure of the value that our policyholders have received is shown by the real rates of return their policies have delivered - that is the return achieved over and above price inflation. By any reasonable measure, these represent very satisfactory returns indeed to our policyholders from their savings.”
Turning to regulatory developments around with profits, Mike Yardley commented: “At the present time there are some question marks over the future of the with profits concept. Well-intentioned measures contained in the FSA’s Colsultation Paper 207, which are designed to codify and regulate the operation of with profits funds, will have the unfortunate consequence of increasing operating costs and limiting the funds’ room for manoeuvre.
“If these proposed rules are not fundamentally changed, so as to reflect the realities of managing with profits funds, many life companies will have no option but to close their with profits funds to new business. Given the very real benefits that Royal London and other with profits providers continue to deliver to policyholders, this would be a significant backward step for UK financial services.”
This article was taken from Scottish Life Website 1/6/2004
To contact Scottish Life - Telephone - 08456 060004
