In a recent paper commissioned by Jupiter Asset Management, the life company analyst Ned Cazalet argues that multi-manager funds will increasingly come to be seen as attractive alternatives to life company with-profits funds. The better the markets do over the next five years, the more likely it is that the payouts from endowments will grow - but, also, the better you would do taking the money and investing it yourself, or in some alternative fund.On the other hand, in a perverse way, the ultra-conservative investment policy that has been forced on weaker life companies in effect underwrites the real returns for those near the end of their terms. The issue for all holders of endowments is whether they could do better by taking their money out and investing it elsewhere, at the same degree of risk. On my calculations, disposing of the policy today would cost me the equivalent of about 2 per cent per annum in returns over the remaining term of the policy. That may not be a huge sum to forgo, but it is not insignificant.There is, sadly, no realistic prospect that the level of terminal bonuses will return to their heights of the 1990s. According to Royal London, the typical terminal bonus that was paid out on 25-year endowments in 1995 was 125 per cent of the basic guaranteed sum and accumulated annual bonuses. It would be irritating to discover in five years' time that you had disposed of your policy at exactly the lowest point in the cycle of returns.
If that continues, it holds out the prospect of a reasonable final value when the policies mature in five years' time.We all know that you pay a high penalty for surrendering endowment policies before they have reached their full term, even if (as you should do) you have checked whether you can obtain a higher value by selling the policy to one of the many dealers in traded endowment policies. The extra year of contributions has resulted in a significant increase in the realiseable value of the policy, and the first sign that terminal bonus rates are now on the increase. (You might wonder at the marvels of actuarial science that such a small difference in the term can make such a big difference to the bonus rates, but this merely underlines how variable the annual movements in payouts have become, making a nonsense of the principle of smoothing on which the with-profits concept was once based).So should I be pleased or not with this development? In a narrow sense, it could be argued that it was the right decision not to dispose of the policy a year ago. In the past 12 months, the government bond index has risen by 10 per cent and the stock market is up by 25 per cent.
The surrender value quoted by Royal London (formerly Scottish Life) has risen by 11.5 per cent over the past year, though the figure reduces to 6.7 per cent if you take account of the further 12 monthly contributions made over the period.When I telephone to ask for more details, the company tells me that the terminal bonus on policies of similar term to my top-up policy has now risen for the first time in years, from its all-time low of 21.1 per cent to 25 per cent now.On the main part of my endowment policy, whose term is three years longer, the terminal bonus of similar-aged policies maturing now is 40 per cent. True, the annual bonus last year was minimal, and I have had the pleasure of receiving yet another red alert warning letter in respect of the loft insulation mortgage top-up that I took out 18 years ago. (The main portion of the endowment, now 20 years into its 25-year term, is in better shape).The good news is that the surrender value of the policy has risen quite steeply since I last enquired about it a year ago So it should have, of course. A plan to reinvigorate sales has led to the sale of 1,200, and this week, the group sold its upmarket fragrance business for $800m.The disposal programme, which was part of Unilever's five-year 'Path to Growth', halved Unilever's debts, but the 'growth' part of the plan resolutely failed.Enter Patrick Cescau, its new chief executive, who has made some improvements in the first quarter of 2005. For some years now this exercise has been a doleful experience - one shared by millions of other people - in which the annual bonuses have shrivelled to virtually nothing and the projected terminal value continues to shrink.
