Scottish Life with profits bonus announcement
Monday, 10 March 2008
Royal London, the UK's largest mutual life and pensions company, has announced revised bonus rates for conventional with profits policies in the closed Scottish Life Fund[1].
Key Points
- Annual bonus rates maintained
- Maturing policies continue to deliver satisfactory returns over longer terms
- Scottish Life Fund returned 2.7% (before tax) in 2007
Payouts
With effect from 1 January 2008
- The payout on maturity of a Scottish Life £50 per month 25-year with profits endowment is £37,692[2]. With total premiums on the policy of £15,000 this represents an annualised net return of 6.7%.
- The payout on maturity of a Scottish Life £50 per month 25-year with profits mortgage endowment is £34,196[3]. With total premiums on the policy of £15,000 this represents an annualised net return of 6.0%.
- The payout on vesting of a Scottish Life 20-year £200 per month with profits personal pension is £95,246[4], an annualised net return of 6.4%.
- The payout on vesting of a Scottish Life 20-year £10,000 single premium with profits personal pension is £53,897[5], an annualised net return of 8.8%.
Commenting on the bonus announcement, Stephen Shone, Group Finance Director at Royal London, said:
"Payouts for maturing policies in the Scottish Life Fund are generally close to asset share.
"This is illustrated by the example of a 25-year savings endowment policy, with a premium of £50 a month, maturing on 1 January 2008. The surrender value of this policy a year earlier (ie on 1 January 2007) was £35,012. During 2007, premiums of £600 were paid and the maturity value increased to £37,692 on 1 January 2008. This represents growth in value over the year of 5.9% for the policyholder."
Details of the above example and equivalent figures for other policy terms are given in table 2b (and table 3b for mortgage endowment policies).
Stephen Shone added:
"The traditional comparison with the value of a policy which matured a year earlier is flawed since the 25-year policy terms cover different periods, as the diagram and text below illustrate.
x% was the investment return between 1 January 1982 and 1 January 1983
y% was the investment return between 1 January 2007 and 1 January 2008
"Looking at the figures for two 25-year savings endowments, one starting on 1 January 1982 and the other a year later, each with premiums of £50 a month and maturing on 1 January 2007 and 1 January 2008, we have maturity values of £40,928 and £37,692 respectively, a reduction of 7.9%.
"However these are two different policies; the first starting in 1982 and maturing on 1 January 2007 and the second running from 1983 to 2008. So the pattern of investment returns and growth in policy values is clearly different between the two plans. The earlier policy will have participated in the investment returns achieved in 1982, but not those in 2007; and conversely for the later policy. So any such comparison is not 'like-with-like'."
Details of the above example and equivalent figures for other policy terms are given in table 3a (and table 4a for mortgage endowment policies). It should be noted that these are not 'like-with-like' comparisons because of the different years each comparison covers, as noted above.
Regarding comparisons with other types of investment, Stephen Shone commented:
"Scottish Life with profits plans have generally provided satisfactory returns over the longer term. For example, a 25-year savings endowment, with premiums of £50 a month, produced a maturity value of £37,692 on 1 January 2008. This equates to a net return of 6.7% a year, even when the cost of providing valuable life cover is not allowed for. Shorter term returns have suffered from less favourable investment conditions."
Details of the above and figures for other terms and for personal pension plans are given in tables 2a, 3a, 5a and 6.
Stephen Shone concluded:
"The real rate of return (ie over and above inflation) for a 25-year savings endowment was 3.3% a year, reflecting the real added value provided by a with profits plan.
"During 2007, the equity backing ratio of the Scottish Life Fund remained around 30%.
"We will continue to manage the Scottish Life Fund in accordance with our Principles and Practices of Financial Management (PPFM), full details of which are available on the Royal London Group website (www.royallondongroup.co.uk)"
Appendix: Scottish Life with profits bonus announcement
-ENDS –
For further information please contact:
Scottish Life
Alasdair Buchanan
Group Head of Communications
Tel: 0131 456 7133
Polhill Communications
Nicola Pierce
Tel: 0207 655 0530
Editor's Notes:
1.Terminology Explained
Conventional with profits
Premiums secure a guaranteed benefit (for example a guaranteed cash sum called the "sum assured" or a guaranteed pension). An annual bonus is added each year to the guaranteed benefit and annual bonus already added. A final bonus may also be added at the date of a claim on the policy.
The guaranteed benefits including annual bonus already added are not payable at face value when a policy is cashed in early. Final bonus is not normally payable on early encashment, although the amount paid may make some allowance for final bonus.
Final bonus is an additional bonus which represents the returns payable on a policy which have not already been provided by the addition of annual bonus.
Market Value Reduction (MVR) is a reduction which may be made to the nominal value of a policy which is being surrendered or transferred before its maturity date. It is used in order to ensure fairness between policyholders who exit early and those who stay.
Equity Backing Ratio is the proportion of the assets underlying the with profits benefits which are invested in equity or property investments.
2 Additional information
Past performance is not a guide to the future. Investment returns may fluctuate and are not guaranteed. Future payouts can go down as well as up.
The figures quoted are only illustrative. An assessment of an individual's need must be confirmed and Key Features provided, together with a projection which is personal to an individual's circumstances, if a recommendation is made.
3 Scottish Life was founded in 1881 in Edinburgh as a proprietary company, becoming a mutual company in 1968.
On 1 July 2001, Scottish Life demutualised and transferred its business to The Royal London Mutual Insurance Society Limited. Scottish Life is a division of Royal London and is the specialist pensions business within the Group, providing individual and group pensions to the market via intermediaries.
Scottish Life and Royal London's other intermediary businesses are based in Edinburgh where 1,200 staff are employed, with 440 working in other parts of the UK and overseas.
Royal London Group is a specialist financial service provider. Its businesses focus on those sectors of the market which value premium propositions, operating through a number of brands:
- Scottish Life – UK pensions market
- Bright Grey – UK protection market
- Scottish Life International – offshore investment markets
- RLAM – fund management
- RLAS – life and pensions administration
- Fundsdirect / Ascentric – funds supermarket; Wrap Platform
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £33.1 billion. Group businesses serve around three million customers and employ 2,620 people. (Figures quoted are as at 31 December 2007).
[1] This announcement relates to Scottish Life with profits business written prior to 1 July 2001 (the date that Scottish Life was acquired by Royal London)in the ring-fenced Scottish Life Fund