Friends Provident latest to cut bonus rates

Friends Provident today became the latest in a long line of UK life insurance companies to cut its bonus rates on with-profits policies, following very poor investment returns due to tumbling stock markets in 2002.

The company cut the bonus rates on unitised with-profit bonds by a substantial 1.2%, from 3.7% to 2.5%. Elsewhere, bonuses on the unitised pension investment bond were chopped from 4.25% to 3%, and conventional endowments and pension plans fell to 0.5%.

Although policyholders may at first have taken consolation from the fact that, while their rates have been cut they have not been scrapped entirely (as Britannic announced it was doing yesterday), the cut was not the end of the bad news. Friends Provident, which demutualised in 2001, also warned that unless it saw a strong recovery in equity markets this year, it was probable that it would have to resort to further bonus reductions. Given the threat of impending war and its impact on the economy, such a recovery seems highly unlikely.

"The fall in investment markets over the last three years has impacted the returns for all of our savings customers," said a Friends Provident spokesperson in a statement this morning, "not least for with-profits policyholders whose policies share in the investment profits and losses of the with-profits fund."

Defending the move, the firm added that its decision to cut bonus rates would increase the guaranteed benefits to over 1.6 million with-profits policyholders and ensure that maturing policies would continue to benefit from good returns at up to 10% a year after tax.