Zero bonus for policyholders

Whole of life policyholders at Sovereign with $400 million of assets backing their policies were allocated zero "bonuses" on the money last year.

Reserve Bank figures show that at the end of December, there was just short of $4.8 billion worth of assets backing old-fashioned whole of life policies at the likes of AMP, Tower, and Sovereign.

The policies are no longer sold but around quarter of a million are still active.

But many of the policies, which mix life insurance and investment, are earning a poor return for investors.

Each year letters are sent to policyholders telling them of the guaranteed bonuses they have been allocated - the equivalent of the investment return on a managed fund.

These bonuses are not published publicly, shielding them from wider scrutiny.

However Sovereign last year announced a zero bonus on the ex-NZI whole of life policies, which appears to be among the lowest of any for whole of life policyholders.

While the guaranteed bonuses were zero, policyholders were allocated "capital growth" bonuses, payable when policies mature.

Sovereign earns a 20 per cent share of any profits, but only when profits are distributed to policyholders in the form of bonuses, not 20 per cent of the returns on the fund assets as suggested in an earlier version of this article.

In 2012, Sovereign earned nothing from the ex-NZI policies, it said.

The zero bonus compares with KiwiSaver default funds earning returns, after fees but before tax, of 6.1-8.1 per cent in 2012, though Sovereign says such a comparison is unfair as the policyholders do get life insurance under their policies. Five-year annualised returns were 4-5.8 per cent on the KiwiSaver funds.

Sovereign said the $400m "investment pool" backing its whole of life policies was "ring fenced", and returns were too low to prudently declare anything but a zero bonus.

"The actual performance (return) earned on the pool had averaged around 3 per cent over the past 6 years," Sovereign said. "In order to maintain sufficient reserves in the pool, and to ensure there is adequate funds in order to pay future claims and maturities, the pool as a whole needs to earn in excess of the average 3 per cent experienced."

"The fund did make a small profit over 2012 and this flowed into the retained earnings of the fund. It was not distributed to policyholders through the addition of an annual (or guaranteed) bonus as it was not appropriate or prudent to do so, given the economic conditions and low interest rates at the time."

Sovereign ended up with the ex-NZI whole of life policies after it bought Colonial in 1997 which had previously taken over Prudential, which had merged with NZI Life, which had previously merged with Mutual Life and Citizens Assurance Company Limited where the policies originated from.

This story has been updated to clarify information about Sovereign.

Sunday Star Times