View from City Road: The pain of a low inflation world
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Your support makes all the difference.The stock market boom last year has helped life offices to avoid large cuts in their 1994 payouts on endowment policies.
Despite all the marketing jargon in which they are dressed, endowments are only long-term investment vehicles and the unexpectedly good performance of the market raised their average return over the years they were in force.
The result, as the new year's batch of bonus announcements from the life companies confirms, is that the value of policies maturing in 1994 has been broadly held rather than cut sharply, as many feared a year ago.
Commercial Union was typical in raising the payout on 25-year policies maturing this year while slightly lowering the 10-year policies. This robustness will be much harder to achieve again, especially with 10-year policies. A repeat of the market's 1993 performance is unlikely and the strong rise a decade ago is falling out of the sums.
Annual bonuses continued to drop sharply this year, as CU also confirmed. These represent guaranteed increases in the value of policies that have not yet matured and are based on actuaries' views of future investment returns, which are expected to fall as inflation comes down. There will be further cuts over the next couple of years before rates stabilise again. Bonuses are now approaching realistic levels.
This should not affect the real return, over inflation, for those using endowments purely as investments. But unfortunately it is the nominal return that matters for those whose endowments were taken out to pay off mortgages, another example of the pain of transition to a low inflation world.
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