Typically the clauses guaranteed an income worth at least 11 per cent a year of the amount saved, so pounds 100,000 would yield an annuity income of at least pounds 11,000.Life offices believed the guarantees would cost them little. But gilt yields would fluctuate with long-term interest rates: pounds 100,000 in pension savings might buy an income of pounds 16,000 this year, but pounds 13,000 next. Savers could never be sure how much income to expect.The sales gimmick usually involved a clause promising customers a minimum annuity rate. The income paid out by the annuity depended on the assets used to back it, namely 15-year gilts.

Starting in 1956, life insurers began to guarantee pension customers a minimum rate of income from savings when they eventually retired and bought an annuity.At the time it was just a sales gimmick. The idea was that customers buying the old form of personal pensions – known as retirement annuity contracts – faced a fundamental uncertainty when they retired.On retirement, customers would be forced by the rules to buy an annuity that paid an income until death. Other insurers such as Equitable Life may have an exposure of up to pounds 1bn. The total sums involved are gigantic: up to pounds 10bn for the whole life insurance industry.What exactly is the annuity guarantee problem? The issue has crept up on the industry in the late 1990s, but its roots lie in the 1960s and 1970s. As with other insurers, NPI now faces the problem of meeting its share of the multi-billion pound exposure caused by providing annuity guarantees.
Analysts say NPI needs to set aside about pounds 300m to cover this. WHEN AMP, the Australian insurance giant, decided to bid pounds 510m in new money for NPI, the mutual insurer, it knew it would have to accept NPI’s financial condition, warts and all.

The IMF, with the benefit of a little more hindsight and factoring in the impact of the Russian default crisis and the credit squeeze foreshadowed by the near collapse of LTCM, reckons growth will undershoot 1 per cent.However, it does, along with Mr Brown, believe that the slowdown next year will be shortlived, partly because of rate cuts here and elsewhere.This all means that the Bank should be wary of cutting too far, too fast and storing up trouble further down the line.. This, combined with evidence of continued growth in the services sector, may be enough to persuade the Bank of England to sit on its hands in January, although another cut is still on the cards in February.In common with every other forecaster apart from the Treasury, the IMF finds it impossible to go along with the growth forecasts that Gordon Brown has assumed for next year and on which his ability to stick to the golden rule or borrowing only to invest depend.The Chancellor believes growth will be between 1 and 1.5 per cent. Supposing the data can be trusted, which is a big if these days, consumer confidence is not quite as low as feared. THE INTERNATIONAL Monetary Fund yesterday added its voice to the growing calls for more cuts in UK interest rates. But the IMF, the Confederation for British Industry, the unions and just about everybody else you can think of may be disappointed, at least in the near term.
The latest indicators suggest the economy is not is in quite as bad a shape as some of the more gloomy pundits were suggesting in the autumn.Of particular note is the surprising strength of November’s retail sales, released last week. Hardly a good prospectus on which to go to the market, as NPI policyholders are discovering.. The chances of a better offer from elsewhere are virtually nil as the auction has already been long and exhaustive Nor does soldiering on alone look like an option for NPI.

The poor management of the company which has brought about its weakened financial condition meant that NPI had little future as an viable independent life office. Since then NPI has mortgaged pounds 260m of its future earnings through a securitisation deal and may have to fork out pounds 350m to cover its exposure to guaranteed annuity payments.Policyholders could, of course, vote down the deal in the spring, but in reality their choice is to like it or lump it. This sum represents the assets backing their policies, a large chunk of which would have been distributed eventually to policyholders anyway in the form of terminal bonuses.Even that pounds 1.4bn is a movable feast as the figure was struck at the end of last year. A policyholder who has been putting, say, pounds 50 a month into an NPI endowment for the last 25 years can expect to see the fund mature with a value of pounds 64,000 against the pounds 120,000 that could have been earned with another life company.AMP intends to distribute the pounds 1.4bn built up in NPI’s life fund But this is hardly largess on the part of the Australians. But it is peanuts compared to the sums they could have made had they lodged their money with a life fund other than NPI. The pounds 800 cash payout dangled before with-profits policyholders may be enough to book next summer’s holiday now.

Without overpaying, the Aussies have picked up a life business with a strong brand name and excellent distribution capabilities that can be integated with their existing Pearl Assurance arm in the UK.But it is an indifferent deal for NPI policyholders. The balance is made up of pounds 1.4bn of policyholders’ own money and an pounds 800m financing facility that AMP will generusly make available to policyholders on commercial terms.
That makes it rather a good deal for AMP. The only new money on offer is the pounds 510m AMP is paying for goodwill. AMP of Australia says that NPI’s half a million members will benefit to the tune of pounds 2.7bn from the takeover announced yesterday It may also snow in Sydney this Christmas. The figures do indeed accumulate to pounds 2.7bn, but it is hard to see how this deal from down under values NPI at anything like that. THE HEADLINE number looks big, but as NPI policyholders have discovered to their cost over the years, it is the bits that have been squirrelled away from view that give a truer picture of the state of affairs. One method of joining forces could be through its French partner Alcatel, which has a 16 per cent holding in Thomson.But the “dream merger” of GEC and BAe is the one that whets the appetite.