Widows cuts pay-outs for fourth time

Published on Wednesday 2 July 2003 01:00

SCOTTISH Widows, the life and pensions firm owned by banking giant Lloyds TSB, has chopped pay-outs to 1.3 million "with-profits" policy-holders - the fourth such cut in the past 18 months.

But despite recent signs of a recovery in the stock market, Scottish Widows warned that there may be further cuts in the pipeline.

It is the second time this year so far that pay-outs on pensions, endowments and savings has been cut, following reductions of between ten and 15 per cent in January.

Last year, Scottish Widows cut its final bonus on with-profits policies by five per cent. That was on top of cuts at the interim stage last year.

The Edinburgh-based firm blamed low interest rates and stock market returns for the decision to cut up to ten per cent off the value of a maturing with-profits fund.

Scottish Widows said the maturity value of its average with-profits savings policy had been cut by between four per cent and eight per cent, effective from July 1.

Mike Ross, the chief executive of Scottish Widows, said: "Although we have seen some modest recovery in stock markets in recent months, current investment returns are still significantly below those earned a few years ago and most commentators expect this situation to continue - alongside low interest rates.

"As a result, bonus rates and pay-outs generally remain lower than they were in periods of higher stockmarket returns and higher interest rates."

And he added: "Indeed, as we warned our policyholders earlier this year, regular bonus rates are likely to fall further unless stock markets recover very sharply."

Mr Ross tried to mitigate the blow to policy-holders by pointing out that bonus rates on some investments, such as its Flexible Options Bond Growth Fund, had been increased and insisting that Scottish Widows was "one of the strongest life assurance companies in the UK".

And he said that although policy return rates continued to be lower than in previous years, "they still compare favourably to many other types of investment in these [fragile stock market] conditions". Mr Ross also pointed out that Scottish Widows had trimmed the maximum penalty for early surrender of policies to between 23-25 per cent of their value from between 27-28 per cent.

Pay-outs for a 29 year-old male non-smoker paying 50 a month into a with-profits endowment policy over 25 years will now get a pay-out of 53,658 on maturity on August 1.

The same policy would have been worth 59,762 on February 1 this year, and 69,928 at August 1 last year.

Similarly, someone paying 200 a month into a pension for 20 years would get just 117,723 if he retired aged 65 in August. That compares with 153,087 last July.

Scottish Widows’ cuts come just a week after rival Norwich Union said it was slicing bonuses. Analysts said the moves could spark similar cuts at other firms.

Over the past year the FTSE-100 index lost about 20 per cent of its value. But it had clawed back about 12 per cent by the end of second quarter of this year

But Kevin Doerr, the deputy actuary at Scottish Widows, said the firm was unable to lift rates as quickly because of the "smoothing out" of bonus payments to with-profits policies. This means bonuses in good years are not as high as or as low as they might if based on returns with years of extreme stock market returns.