Rachel Stevenson: An unhappy new year to many policyholders

Millions of with-profits pension and bond savers will not look forward with pleasure to the New Year tidings their insurance companies will be sending them in the next couple of weeks: a bonus cut. Again, the investors will be asking themselves what they have been paying into all these years and what insurance companies have been doing with their billions of pounds.

This week we heard that Standard Life, which has prided itself on being the strongest player and highest bonus payer in the UK, is deep in talks with the Financial Services Authority over new solvency rules. It is possible these could end up in the insurer being forced to cut its bonuses further to ensure it has enough capital to meet all the high guarantees it has promised policyholders. Standard, with its usual "We know best" attitude, insists its financial strength is as sound as ever. The new rules are supposed give a more realistic view of solvency, but it seems Standard's idea of what is "real" does not match the regulator's.

The demutualisation campaign under way by David Stonebanks, then, could be coming at an opportune time for the insurer. Standard's sales pitch as the best-paying mutual is falling apart and it seems it may need to raise capital. Mr Stonebanks may not have as much of a fight on his hands as he thought.

He can probably bank on more support from policyholders, at least. Endowment policies are already short of their mortgage targets and look ready to fall even shorter, and Standard policyholders are not alone in their woes.

Axa Sun Life began the bad news this week, cutting annual bonuses by up to a third on some policies. Prudential may have tried to crow that it had maintained bonuses for its with-profit bond customers this week as a result of its kryptonite strength, but there is not really much to crow about. Only a small fraction of its policyholders have with-profits bonds and this is a product the Pru is desperate to market at present.

The cynics among us could say its bonus policy is biased. Most of its customers will find out their bonuses next month, and it would be surprising if they are not cut. Norwich Union will reveal its bonuses next week and it, too, is likely to offer customers no more than they were given last year. Like last year, some bonuses, may be scrapped.

Explaining bonus cuts after three years of falling stock markets is straightforward for with-profits providers. But the stock markets have risen since their lows in March last year, and optimism has returned that they are, at least, robust at their present levels. So why isn't the "profit" part of with-profits kicking in? Where is the smoothing that is supposed to ensure good returns throughout all stock-market conditions?

Insurers sold billions of pounds of equities last year and in 2002. Equitable Life admitted it would have been bust and in the hands of administrators had it not dumped £4bn of equities last year. Insurers, then, have much reduced their positions in the market and they have not participated in the upside. Even Standard, which has kept a high proportion of its fund in equities, has suffered so badly that the pick-up the markets is not enough to repair the damage done by years of over-investment.

Reserves have been depleted to such an extent that the prospect of smoothing has long disappeared. Any gains now are being hoarded to rebuild their reserves, so they can meet guarantees they have promised to some policyholders.

Many more big names could close to new business, maybe even Standard, if they no longer have the capital to finance their new business. There are thousands of savers in closed funds, in companies as large as Britannic, Pearl, NPI, and Royal & Sun Alliance. Insurers with closed funds do not have to compete for new business, and do not really care much about bonus levels.

With the prospect for bonuses so poor, there seems nothing to attract a new investor, and existing customers should be reviewing their policies.

* If you have a with-profits policy and wanted to go to David Aaron Partnership for advice, you would find that difficult. About 150,000 customers have been left wondering what has happened to their independent financial adviser (IFA). David Aaron has gone in to voluntary administration and it is thought pressure to meet mis-selling claims against it for so-called "precipice bonds" proved too much. These are highly-geared fixed-term investments that can wipe out investor's capital unless stock markets behave in a particular way. Some investors have seen their money at disappear at double the rate the stock market has fallen, and many, as shown in the "Questions of Cash" column on the page opposite, lost all their capital.

David Aaron, which sold precipice bonds by the sack-full, is the second large IFA firm to collapse recently, after RJ Temple. Chase de Vere, another well-known Bristol-based IFA, was hit by a large fine from the Financial Services Authority for its marketing of the bonds.

There could be more fall-outs for IFAs. The FSA is still investigating other firms for precipice bonds and several financial advisers have been questioned over the advice given on split-capital investment trusts.

That two major IFA firms have gone under raises questions about the financial strength of the rest of the sector. Most financial advisers are small firms, with only one or two practitioners. All must have professional indemnity (PI) insurance, which covers them from the risk of mis-selling claims. But as more scandals break, premium rates for PI insurance rocket, and some are finding it too expensive to stay in business.

Investors are being encouraged to seek independent advice on financial products as the best means to ensure they get the most appropriate product for them. But with news emerging of widespread mis-selling, the virtues of independent advice get lost. Lloyds TSB was also fined by the FSA for mis-selling precipice bonds, but what else can you expect from commission-driven bank salesmen? IFAs have spent years protesting their innocence of pensions mis-selling, and it is fair to say direct salesmen of the insurance companies were the most at fault. But the reputation of IFAs is floundering again, and with endowment complaints on the increase, there seems to be little escape.

It is no wonder that IFAs are looking for a way out, and some have been bought by bigger companies, including insurers, who see the benefits of a distribution channel for their products. Aegon, for example, the Dutch insurer that owns Scottish Equitable, has been buying IFAs. There is, at least, more certainty that the adviser itself will not go bust.

r.stevenson@independent.co.uk