Standard Life slashes bonuses after losing top slot to Aviva

Standard Life, the insurer that this week denied its members the opportunity to vote on demutualising the company, yesterday slashed 6 per cent off payouts to its 2.6 million customers, cutting bonuses for the second time this year.

The company also reported that sales for the first six months of its financial year were down sharply, by 25 per cent worldwide and by 27 per cent in the UK. It has now slipped behind Aviva as the leading provider of life insurance and pensions products.

As a result, a 25-year endowment policy would now pay out £69,386, compared with a payout of £75,984 before the last bonus cuts in February. The company had then knocked 15 per cent off payouts, following a 10 per cent cut in September last year.

Yesterday's further cut backs in payouts are unlikely to be the last that policyholders see, and another cut of up to 10 per cent may come in February 2004. Reductions are likely to continue well into 2005.

Sandy Crombie, deputy chief executive, warned: "We are in a period of low rates of inflation and low returns. As each year of lower rates of return pass, then payouts will be smaller year on year." He insisted, however, that Standard's payout levels were still very competitive and that its policyholders were 11 per cent better off as a result of Standard's mutuality.

The company held an overweight position in equities throughout last year, when stock markets fell for the third year running. Standard now has to cut back policy values to account for the £5bn it lost last year.

The erosion of its capital has been so extreme that the company had to use £1.5bn of future profits to help it over its solvency hurdles. It said yesterday that it had made use of waivers from its solvency rules awarded by the Financial Services Authority and that the free asset ratio in its with-profits fund was 14.3 per cent, excluding the future profits.

Mr Crombie stood by the company's investment policy, saying it had enjoyed a 5 per cent return on its investments since December. This is not enough, however, to offset the need to lower bonus levels.

It now has 59.3 per cent invested in equities, one of the highest exposures to the stock market in the sector, and says this makes it well placed to benefit from further growth in the stock market. Mr Crombie said the company may make further investments in equities as the market continues to improve.

Standard, which is led by Iain Lumsden, was able to provide some good news for holders of endowment policies. Many of Standard's 1.4 million endowment customers are facing shortfalls between their policy values and the mortgage the policy was designed to pay off. Standard is receiving hundreds of complaints from mortgage endowment customers a week, but because markets have rebounded from their lows in March, many of the shortfalls are now reduced.

The company was also able to lower the penalty it charges customers that want to exit their policy early as a result of the reduction in payout levels and a strengthening of the market.