Prudence needed in setting annual bonus rates

John Tiner, FSA Managing Director, said:

Bonus rates are properly a matter for the boards of life companies to determine, on the advice of their appointed actuary. Companies have a responsibility to treat their customers fairly. In exercising that responsibility, following a period of adverse market conditions, companies should set bonus rates at levels that do not jeopardise payments to policyholders in future years. Companies should set bonus rates that are in line with their ongoing financial soundness, and that are a fair reflection of their ability to pay.

Obviously it would be equally unacceptable for companies to rein back on justifiable and manageable bonus payments to their policyholders just because they know that their competitors are being less generous.

Most companies announce their annual bonus rates early in the New Year. So now is the right time to stress the importance of taking careful account of market conditions, plus any potential strains on with-profits funds from other sources, such as guarantees, in setting bonus rates.

Companies that have written with-profits business must be prepared to justify to the FSA any bonus declarations that they make and to explain how they balance factors such as smoothing of returns and prudent management of their financial resources.

Notes for editors

1. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate protection of consumers; and fighting financial crime.

2. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.