Terry Murden's Business Blog: Smooth talking Friends leave a big hole in policy payouts

THANK you very much, Friends Provident. After years of paying me a paltry annual bonus (little more than £8 a year - not even enough for a decent lunch at Starbucks) the firm has cut payouts on its with-profits policies by 20%. That's just in time for my 20-year policy to mature next month.

When the cheque arrives, it will be lower than the amount I would have received if I had surrendered the policy last year. On top of that is the money I have invested in those 12 months, amounting in total to more than £1,000. Oh, and there is the £4,500 shortfall on what it was meant to pay, which means I'll also have to dip into my savings. All in all, a rubbish policy that has left me wondering why I bothered.

Life and pensions companies are fond of telling us about smoothing, that money earned in the good times allows for the bad times. Well, it doesn't work. If it did, I would at least get the sum I was promised when I signed up for it.

Friends announced at the weekend that the cut in bonus rates was a reflection of a weak investment performance by its with-profits fund which fell in value in 2008 by 10.5%.

An investor paying £50 a month for 25 years will see his payout reduced from £36,425 a year ago to just £29,184. That's a 20% cut.

The company reiterated the smoothing argument in an attempt to mitigate this disaster, claiming that without smoothing the situation would have been even worse.

But critics have pounced on Friends Provident, one describing its bonus review as "about the worst with-profits bonus declaration I've ever seen" and saying it was not so much an investment strategy so much as crisis management.

Undoubtedly the past year has been wretched for returns on any investment. But what about the famous smoothing? Looking at the correspondence I have had with FP in the years 2004 to 2007 there was little indication that performance was any better at that time - and this was during the bull run. The only sensible conclusion is that somebody has badly underperformed - using my money.

I have written previously about the outrageous salary bonuses paid to FP's management while we mug punters cough up for policies with poor returns. I shall be watching carefully how deep they stick their noses in the trough this year - and what further excuses they come up with.

Terry Murden is Business and City Editor of Scotland on Sunday