Aegon with-profits terminal bonus rates cut

Aegon has written to investors and their advisers informing them of changes to their ‘with-profits’ policies that will see certain unit prices and enhancements to terminal bonus rates being reduced, it claims due to increased regulatory requirements.

Speaking to FTAdviser, the provider was quick to point out that all associated guarantees remain in place, including guaranteed investment returns of up to 5.5 per cent a year and guaranteed annuity rates.

Enhancements to terminal bonus rates have been reduced for all investors during the course of this year, while the unit price of the with-profits endowment pension fund will be reduced in early 2015.

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The unit price reduction relates only to investors in the with-profits endowment pension fund prior to mid-1995. For these investors, Aegon plans to reduce the unit price of the fund at all dates prior to the pension date.

For the majority, specifically those where terminal bonus is payable prior to the change, this will have no impact in the policy valuation because the terminal bonus rate will be increased to cover the difference.

In recent years Aegon said it has been enhancing its terminal bonus out of surplus assets in the fund, but during 2014 the level of these additional enhancements have been gradually reduced with the effect of lowering terminal bonus rates, and therefore total payouts, by 7 per cent.

Aegon said the changes were being made in response to increased solvency requirements and low interest rates which have increased the cost of maintaining the guarantees.

The firm said it expects increases and decreases in the level of enhancements from surplus assets to be reflected within terminal bonus rates. All guarantees remain in force and it added investors will receive terminal bonuses which reflect the fair value of investment gains.

Nick Dixon, Aegon’s investment director, told FTAdviser the performance of Aegon’s with-profits funds has been “very credible”, with 11-year annualised returns after these changes being in the region of 4.5-7 per cent.

Mr Dixon stressed the firm will not benefit financially from any of the changes and noted that management follows mutual principles, with 100 per cent of investment profits remaining in the fund for the ultimate benefit of policyholders.

“These guarantees are very valuable and we’re just making sure there’s enough long-term capital to maintain them.

“Essentially, you don’t need to be a rocket scientist to see that low interest rates have meant returns falling across the board, so you need a bit more capital to sustain requirements. Then in terms of capital requirements, there have been incremental increases over the last few years that need to be accounted for.”

He added that the changes were “broadly in line with the wider market” and most guaranteed income providers were taking similar measures.

To read FTAdviser’s recently published Guide to With-Profits and earn 60 CPD minutes, click here.