Home Finance & Investments Healthy Investment defers bonus declaration to maximise potential member returns

Healthy Investment defers bonus declaration to maximise potential member returns

Peter Green of Healthy Investment

Healthy Investment, the Bury-headquartered friendly society and mutual insurer, has deferred the annual bonus declaration on its Ethical With-Profits Fund until later this year. Members had been due to receive details of the bonus to be added to their savings and investment products this month.

Because annual bonuses are locked in once declared, the society said any declaration now would have had to reflect the current market turmoil, and would have been lower than it expects to be able to declare once market volatility has subsided. In the meantime, interim bonuses will continue to be added to members’ policies until the annual bonus is declared.

Once an annual, or “reversionary”, bonus has been declared it cannot later be revised upward or downward. Because of the ongoing uncertainty surrounding the effect on markets of the coronavirus pandemic any reversionary bonus declared now would, of necessity, have had to err on the side of caution to protect members’ capital – protection of members’ capital being very much in line with the Prudential Regulation Authority’s recent statements.

Interim bonuses, on the other hand, are not fixed and can be changed at any time. This enables them to be paid at a rate that would not have been possible as a locked-in reversionary bonus.

Peter Green, Chief Executive of Healthy Investment, explained, “The Prudential Regulation Authority made it clear in a letter last month that it expects insurance companies first and foremost to focus on capital protection when making decisions about the distribution of profits. We fully support this position and, rather than declaring a bonus now, after much deliberation we have decided to defer the decision on this year’s reversionary bonus until stability returns to the markets and we have a clearer picture of the economic outlook.

“2019 was a very good year for Healthy Investment, with our assets under management growing by more than 15 per cent, and we had been looking forward to declaring a substantial bonus to add to our guaranteed fund values. We will, of course, still be declaring a guaranteed bonus but, rather than announcing one now, we will instead wait until the autumn when we hope the economic backdrop will have improved, enabling us to announce a bonus that more accurately reflects the society’s performance during 2019.”

With-profits investments, such as those provided by Healthy Investment, differ from direct stock market or unit-linked investments in that, rather than immediately experiencing the ups and downs of market volatility, members’ fund values grow by the addition of annual and final bonuses based on the profits of its with-profits fund. The with-profits model holds back some of the returns made on its funds in good years to subsidise bonuses in years of weaker market performance.

In extreme situations the society would have the ability to reduce a member’s fund value. Known as a “market value reduction”, this would occur if there had been a significant fall in the value of investments that it had not been possible to smooth out using gains from previous years.

Even with the market turmoil experienced in 2020, however, the Society has not needed to apply market value reductions to the funds of any members wishing to withdraw money invested before the end of 2019.

Healthy Investment’s with-profits fund has a diversified portfolio of assets, much of which is now held in government securities and fixed interest corporate bonds. These asset classes have seen little capital reduction since the beginning of the year.

This cautious asset allocation, taken together with the smoothing effect of annual bonuses, has enabled the society to declare a positive interim bonus to add to members’ investments at a time when unit-linked investors are bearing the full brunt of the recent investment market falls. It is at times like this, Mr Green said, that the value of with-profits funds becomes clearest.

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