Standard Life to cut with-profits bonuses by 20 per cent as market fall continues

Standard Life, the UK's largest mutual insurance company, will today tell its 2.1 million policyholders that their with-profits bonuses will be dramatically reduced after the continued fall in the stock market.

Bonuses on with-profit pensions, bonds and endowments are set to come down an average 20 per cent, and could be cut as much as 50 per cent, reducing the average payout by 15 per cent.

Analysts estimate Standard has lost up to £11bn in capital in the past year. The mutual held more than 70 per cent of its £30bn with-profits fund in shares at the start of 2002. This had come down to about 56 per cent by September, but the capital available to pay policyholders has still been decimated.

Payouts from the mutual have traditionally been very high and policyholders have received up to 50 per cent more than the value of the assets backing their policy. This costs Standard an extra £500m to fund at a time when the with-profits fund had made a loss on its investments of up to 15 per cent.

Standard is also facing a capital crunch from the costs of financing its high volumes of new business and from guarantees it has promised some with-profits policyholders, which need in the region of £600m a year to fund. The company yesterday said its balance sheet had been weakened but insisted it was in no worse shape than other insurers.

Aviva has already scrapped bonuses to some of its policyholders and reduced payouts by an average of 20 per cent. The Britannic Group has suspended all annual bonuses to its 1 million policyholders.

Gordon Arthur, a spokesman for Standard Life, said policyholders are still receiving competitive payouts. He said the majority of Standard's policyholders would not be affected by today's bonus announcement as their investments had another 15 years to run, over which time equity markets will recover.

The mutually owned firm is thought to be have been active in mitigating its exposure to equities in the past few weeks. Action by many insurers to offload vast chunks of shares to stay above their solvency margins has served to depress markets further. On Friday, the FTSE closed down 11 points at 3567, a 9.5 per cent fall in a month.

The Financial Services Authority took the unprecedented action on Friday evening to relax the solvency rules for insurers to stop the vicious circle of forced selling. The regulator is now prepared to grant a solvency waiver to companies that apply to it for help, provided they have a robust recovery plan in place.

Whether the extra breathing space given to life insurers on their equity holdings will create an upturn in the market remains to be seen.

Market experts were uncertain yesterday whether the FSA changes would be enough to breathe life into the FTSE 100 index today, though Friday's 109 point rise on the US Dow Jones will help.

Richard Jeffrey, head of research at Bridgewell Securities, said: "It's difficult to tell and you do have to be careful about relaxing rules which were made for a very good reason in the first place. Equities are trading below their fair value here and it is likely that once some of the uncertainty disperses we will see some sort of recovery.

"But the uncertainty is not just Iraq. There are also issues about the domestic recovery in the UK. America has been through it's recession. In the UK I don't think we can be so confident."