Prudential international enjoys increase in policy values, norwich union announces bonus sterling rates of 5%
Pay outs for with-profit policies are showing further signs of improvement since the TMT bubble burst in March 2000, with Prudential International just announcing an increase in policy values and Norwich Union improving bonus rates.
Policy values for the International Prudence Bond rose by 12.9% for the sterling-denominated product, 6.7% for its dollar version and 10.3% for the euro.
Martin Brookes, director of portfolio management at Prudential International, said: "Its weighting to equities helped with the performance and have delivered the real rate of returns.
"Presently, the portfolio is 74% equity plus property exposure, which was up 10% from the previous year. Last April, exposure into UK and European stocks was increased and in October we moved into the US market as valuations looked cheap.
"I am cautious about bonds as this asset class looks expensive compared to others."
The Norwich Union with-profit fund also performed well on the back of high equity weightings, pointed out Clive Scott Hopkins, director at Towry Law. He said NU's 72% equity backing ratio, up from 67% a year ago, has stood them in good stead when coupled with a high free asset ratio.
The fund, which is available in NU's offshore bonds, had bonus rates of 5% for its sterling and 4.75% for its euro/dollar version.
John Lister, chief actuary at Norwich Union, commented: "The UK economy has seen growth over the past year largely as a result of strong merger and acquisition activity and buoyant corporate earnings. Rising oil prices also gave a boost to the FTSE All-Share index.
"The US economy, which acts as a barometer to the world economy, has also demonstrated growth over the past year, supported by the continuing strength of US consumer demand and the vibrant US housing market.
However, Lister is not expecting equity markets to return the same in 2006 as 2005. He anticipates returns this year of between 5% and 10% for equities and property.
Nigel Masters, chairman of the Actuarial Professions Life Board, warns maturity rates are still unlikely to show the high returns of the 1980s and 1990s.
He explains for a 25-year endowment policy maturing in 2006 and beyond, fewer premiums will have earned these outstandingly high returns compared with a corresponding policy maturing in 2005.
The Profession expects projected endowment shortfalls to reduce compared with those projected one year ago, especially where with-profits funds have benefited from strong results shown in company shares or property investments in 2005.
Steven Whalley, head of marketing investment products at Scottish Equitable International, said: "In respect of the UK market, it is a case of evolve or die. As seen by the slump in new business into with-profits, seen most dramatically in the UK onshore bond market, it is no longer attractive to the majority of advisers.
"This can be compared to our experience of our next generation with-profits funds, which have taken in more than £12m since 2003."
Scottish Equitable International offers a next generation style with-profit fund for investors. This product does not pay out annual bonuses. Rather, performance is smoothed daily, which is currently half-way between the actual returns of the underlying assets and the disclosed expected growth rate.
This compares with old style with-profits where if the underlying investments were valued at less than the declared bonuses, returns had to be reduced by a market value reduction.
Scottish Equitable International currently offers two funds, including a growth which has 70.4% exposure to UK equities and 15.1% to overseas equities and 58.1% exposure to bonds.
Nigel Masters, chairman of the Actuarial Profession's Life Board, said: "The precise levels of this year's bonus announcements will depend on the extent to which the with-profits funds have been exposed to stock market or other asset classes that performed strongly over 2005.
"The yields available on UK gilts are at the lowest levels seen since the 1950s. This suggests with-profits bonus rates will remain low unless the with-profits fund concerned has exposure to riskier investments such as company shares, and the riskier investments do well.
"Nevertheless, with-profits policies often contain valuable guarantees that can be difficult or expensive to replace and, with the low inflationary outlook, the real returns available from with-profits policies should remain competitive with those from other choices.
With-profits policyholders evaluating their options should consider the information from their life company explaining how their funds are run."
Clive Scott Hopkins, director at Towry Law, said: "This, the first major full bonus declaration, signals a turn round from falling rates since the late 1990s. However, while most policies are showing increased underlying cash values, it has to be recognised that actual maturity values on longer term policies are still down.
"The CGNU 25 year benchmark with-profits endowment, while delivering an 8.6% per annum net rate of return, is maturing for £50,295 as at 1 January 2006, compared with £52,576 at the same time last year. This is down 4.3%.
"Policyholders must wonder why this is so when markets have improved strongly since March 2003, but this is because the huge market downturn between the end of 1999, coupled with the high returns of the early 1980s falling away, and expected lower returns going forward in a low inflation environment, have an increasing impact as time goes by."
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