This article is quoted from here

The truth about bonus rates, Interactive Investor, 22 March 06

'According to the dictionary, “bonus” means “additional payment above what is due or expected” or “a gratuity”. However, if you’ve got a with-profits policy, you will know that the annual bonus isn’t a windfall or a thank you; it’s your return. A bonus of 0% means your investment has made absolutely nothing in the last year.

At the end of February, a few insurers, including Norwich Union and Standard Life, had declared their bonus rates for 2005; a year that saw the stockmarket rising sharply. The FTSE 100 index of leading shares was up by around 17%.

You would not necessarily expect with-profits funds to produce that kind of return, because they don’t just put money into shares, they reduce risk by investing the premiums in a portfolio of shares and less volatile assets such as cash, gilts and property. But Standard Life, for example, says the underlying assets backing its with-profits policies made a return of over 16% (before tax) in 2005. Obviously investors aren’t going to get that converted into a bonus as some of it will be held back to be paid out in the lean years, to smooth the policy’s performance.

Puzzling policies

However, it’s still a bit puzzling as to why bonus rates are only 0.25% on the company’s conventional with-profits pension policies (and 2% on unitised with-profits pensions). It’s even harder to explain the difference in growth when you start looking at individual policies. For example, a 10-year savings endowment with a 50-a-month premium maturing now would have had an effective growth rate of 12.3% last year. Not bad. But a 20-year mortgage endowment, with the same premium, would have only grown by 1.3%. Why is that?

I’m sure the number-crunchers at companies like Standard Life have a very good explanation for how they arrive at the bonus figures. And, to be fair, what Standard Life does isn’t particularly different from the rest of the industry. But that doesn’t make it any easier to explain to investors.

With-profits policies are complicated products and, because of the way they are structured, it’s difficult to get transparency. However, some financial advisers have complained that, as things stand, it’s almost impossible to advise clients about whether they should stick with their policy or bail out.

It is estimated that over 385 billion is currently invested in these policies – yet, if advisers are finding them hard to assess, what hope is there for the rest of us?'