Every year the UK’s life insurance companies declare annual bonuses in January and February. However, policyholders hoping for a return to the high bonus payouts of the late 1990s will be disappointed.
The Profession forecast last year that "payouts are continuing to fall and are set to do so for a number of years yet". So far, this forecast has turned out to be accurate, due to the combination of continuing low yields on gilt-edged stock and the negative returns that resulted from investing in equities from 2000 to 2003.
This trend was exacerbated by life companies being forced to sell equities over 2002 and 2003, as the market approached its lowest point, in order to meet the FSA’s strict solvency requirements. Having a smaller holding of equities at this point prevented them from benefiting as much from the subsequent improvements in the stock market
Investment returns are not expected to reach the high levels of the 1980s and 1990s in the near future. So payouts from with-profits policies can be expected to continue to fall until the policies affected by the good returns of those earlier decades have all matured. Customers with policies of 10 years duration or less may have already seen the worst of the falls, but payouts from longer term policies are likely to continue to fall for several years yet.
Up to date projections of policy benefits from the relevant life company should reflect all these aspects and provide a better indication of likely policy payouts than comparisons with payouts from similar policies that matured in 2004.
Nigel Masters, Chairman of the Actuarial Profession’s Life Board, commented: "Policyholders are seeing the results of lower returns in terms of reduced bonuses now and, in all likelihood, for several years to come. This is a reflection of the lower returns available from stockmarkets and other investments around the world. With a lower inflationary outlook, the real returns from with-profits policies may nevertheless remain competitive with those from other investment choices."
