L&G Bonus Announcement 2001
Legal & General Group PLC
28 February 2002
LEGAL & GENERAL ANNOUNCES 2001 BONUS RATES
==========================================
Following a year in which equity markets fell significantly, Legal &
General's bonus declaration reflects the benefits of both a balanced
portfolio of investments and the smoothing process - an integral feature
of with-profits policies.
Balanced Investments
--------------------
The total return on the FTSE All Share was a negative 13 per cent during
2001. By contrast, the return on the assets backing with-profits business
was a negative seven per cent for pensions business and a negative five
per cent net of tax for life assurance business. This return indicates
the benefits of investment in fixed interest and commercial property
assets in 2001, which provided positive returns outperforming those of
equities. The allocation of assets backing with-profits business is
detailed below.
Smoothing
---------
A 25 year policy* taken out on 1/03/77 will receive a payout of £73,566.
A similar but 24 year policy* taken out on the same day would last year
have received a payout of £74,895. This fall in payout when adjusted for
the receipt of the final year's premiums is less than the 5% negative
return on the fund during the year, referred to above. The bonus
declared for 2001 therefore demonstrates the benefits of smoothing for
with-profits policyholders in times of poor investment return.
The bonus declaration process has been subject to independent peer review.
Outperformance of Return
------------------------
A 25 year endowment policy* maturing on 1/03/02 will have delivered a
nominal rate of return of 11.1% per annum and a real rate of return of
6.7%. A similar investment placed with a building society would have
yielded an annual rate of return of only 5.1% and a real rate of return of
0.9%.
*Maturity values and yields for a Legal & General with-profits endowment
policy taken out on 1/03/77 by a 29 year old male paying £50 per month.
Prudent Approach
----------------
Legal & General's approach to bonus declarations takes account of current
investment conditions and expected future inflation and investment
returns. The stock market performance of 2000 and 2001 has been below
Legal & General's longer term expectations and this has not been fully
reflected in the bonus declaration for these years. Legal & General
expects future investment returns to be better but it will require a
significant stock market recovery during 2002 followed by a period of
good and sustained investment returns to avoid further bonus rate cuts for
those whose investments experienced the falls of 2001. Nevertheless Legal
& General expects that its with-profits policies will offer attractive
returns over the long term when compared with cash deposits and inflation.
Legal & General believes its prudent action in setting bonus rates
maintains fairness between all generations and classes of with-profits
policyholders and meets the concerns raised by the Financial Services
Authority in its 18 December 2001 announcement. Together with the
continuation of the AAA financial strength rating from Standard & Poors
for the financial strength of our UK Long Term Fund it demonstrates our
commitment to maintain a strong with-profits fund for the benefit of all
our on-going customers.
Notes to editors:
-----------------
1. *Maturity values and yields for Legal & General 25 year with-profits
endowment policies taken out by a 29 year old male investing £50 per
month and maturing on 1 March 2002 are:
Endowment Assurance Policy: £73,566 (2001: £86,895). This is an actual
return of 11.1% and a real return over inflation of 6.7% (2000: 7.2%).
This rate of return is 6.0% higher than the 5.1% the same investment would
have obtained from an average higher rate building society account. The
returns from the average higher rate building society deposit account are
the net rates to 1 March 2002 assuming that interest rates for January to
1 March 2002 remain at the January 2002 level (Source Micropal). A
building society guarantees the capital and added interest of its
investments.
The 'real rate of return' represents the yield obtained in excess of the
return earned if the premiums had grown in line with the RPI (increase in
RPI for the period December to March 2002 remains at the same level as
December 2001).
Low Cost Endowment Policy: £72,279 (2001: £84,869). This is £44,623
greater than the mortgage of £27,656 it was designed to repay. The
policy carries a higher level of life assurance cover than the endowment
assurance policies.
2. Further details
Examples of payouts to customers with policies maturing in 2002 are in the
appendices below.
3. Bonus Policy
The 2001 bonus declaration is in line with Legal & General's principles
which aim to provide competitive and equitable returns for policyholders
while maintaining the strength of the Long Term Fund for future
generations of policyholders. This requires Legal & General to:
- Treat all generations of policyholders and types of policies fairly.
- Take account of the amount of assets generated by each type and
generation of policy allowing for investment returns achieved and
expenses incurred.
- Smooth maturity returns to policyholders so that they are shielded
from some of the fluctuations that can be experienced in investment
returns and other factors.
4. Total Cost of Bonuses in 2001: £809m (2000: £848m).
5. Investment Mix:
The investment mix backing participating with-profits business in
aggregate showed little change during 2001.
End 2000 End 2001
% %
Fixed Interest 20 23
Property 14 15
Equity Shares
UK Shares 48 44
Non UK Shares 16 15
Unlisted Shares 1 1
Other Investments 1 2
--- ---
100 100
The asset mix is the mix for all the participating with-profits business.
The asset mix and therefore the investment return attributed to different
types and generations of policyholders may be different from the above as
it reflects the different product designs, guarantees and representations
made to policyholders. The change in asset mix in 2001 principally
reflects changes in asset prices. The asset mix may change in the future.
The investment return earned on the participating with-profits business
in 2001 was a negative 7% gross, a negative 5% net.
Regulatory Notes:
* Past performance is not necessarily a guide to future performance.
* Legal & General Assurance Society Limited is regulated by the
Financial Services Authority.
* Returns from with-profits contracts are dependent on bonuses. Future
bonus rates are not guaranteed.
* Unlike a with-profits policy, capital and income in a deposit account
is guaranteed on encashment.
* The surplus arose during a period when investment returns were high,
similar returns and therefore such large surpluses may not be
available in future years.
Issued By:
John Morgan
Head of Public Relations
Tel: 020 7528 6213
Appendix A
2001 ENDOWMENT ASSURANCE BONUS DECLARATION
------------------------------------------
ANNUAL (REVERSIONARY) BONUSES ON LIFE POLICIES
2001 2000
1.50 % of sum assured 2.00
2.75 % of existing bonus 3.50
PAYOUTS ON MATURING ENDOWMENT POLICIES
£50 per month
Maturing Yield % Maturing Yield %
1/3/02 (Real Return) 1/3/01 (Real Return)
£ £
25 Year Payout 73,566 11.1 86,895 12.1
(6.7) (7.2)
20 Year Payout 33,696 9.4 39,233 10.7
(5.9) (6.7)
15 Year Payout 17,217 8.2 19,127 9.4
(5.2) (5.9)
10 Year Payout 8,470 6.7 9,330 8.5
(4.4) (5.7)
Notes:
------
1. The examples assume a male aged 29 paying a premium of £50 per month
2. *The 'real rate of return' represents the yield obtained in excess
of the return earned if the premiums had grown in line with the RPI
(increase in RPI for the period December to March 2002 remains at the
same level as December 2001).
Appendix B
2001 UNITISED WITH-PROFITS BONUS DECLARATION
--------------------------------------------
The figures in the table are the running yields for premiums paid in 2001
and the interim running yields for premiums paid in 2001 and 2002. The
equivalent interim running yields declared last year on premiums paid in
2001 are shown in brackets.
SINGLE PREMIUM LIFE POLICIES (CURRENT SERIES)
With-profits Income Bond
2001 Running Yield 6.50%* (6.50)%*
2002 Interim Running Yield 5.00%*
With-profits Growth Bond
2001 Running Yield 4.50%** (5.00)%**
2002 Interim Running Yield 4.00%**
REGULAR PREMIUM (ANNUAL) LIFE POLICIES (LATEST CONTRACT VERSIONS)
Flexible Mortgage Plan (Higher rates apply to some earlier versions of
the Plan)
2001 Running Yield 5.25% (5.50)%
2002 Interim Running Yield 4.25%
Savings Plan (Higher rates apply to some earlier versions of the Plan)
2001 Running Yield 4.35% (4.85)%
2002 Interim Running Yield 3.60%
REGULAR PREMIUM (ANNUAL) PENSIONS POLICIES
Personal Pension Plan (accumulation units)
2001 Running Yield 5.50% (6.00)%
2002 Interim Running Yield 4.50%
Notes:
------
* For Income Bonds sold from 1 January to 30 June 2001. The three rates
for income bonds sold from 1 July to 30 September 2001 were 6.25% and
from 1 October 2001 to 31 December 2001 were 5.75%.
** For with-profits bonds sold from 1 January to 30 June 2001. The rates
for income bonds sold from 1 July to 30 September were 5.0% with an
interim running yield of 4.5% for 2002. The three rates for income bonds
sold from 1 October 2001 to 31 December 2001 were 4.0%.
For most of Legal & General's Unitised With-profits policies growth
attributed comes from the addition of a 'contractual addition' and the
addition of bonuses. Both depend upon when the premiums were paid and
can vary from year to year. Where Unitised With-profits policies do not
attract a contractual addition the annual bonuses have been
correspondingly higher.
Each year a normal, annual bonus, is declared for the previous year and
the sum of the normal annual bonus and any contractual addition is called
the 'Running Yield'. An interim bonus rate, which is not guaranteed and
which can be changed without notice is also declared and applies in
respect of the current year for any claims. 'Interim Running Yield' is
the sum of interim bonus and any contractual addition. NB: the annual
bonus rates declared for 2002 may be different from the interim rates.
Terminal bonus may also be paid in the event of claim. Terminal bonus
rates are not guaranteed and can be changed without notice. For
with-profit Income Bonds the total return comes through the addition of
annual bonus. There is zero terminal bonus.
The Unitised With-profits terminal bonus rates which range from 0% to
6.40% per annum also depend on the policy type and when the premiums were
paid.
Legal & General reserves the right in certain investment conditions to
reduce the amount payable on surrender or switch by the application of a
Market Value Reduction Factor.
Further example of bonus rates applicable to premiums paid in other
years can be obtained from Legal & General.
This information is provided by RNS
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