2009 was another problem year for Aviva with-profits funds. 2008 had been bad enough with the "is-it-on-is-it-off" reattribution affair. Criticism was thrown at Aviva from every angle as the funds available to distribute to policyholders who accepted the reattribution payment was cut drastically.
Article posted initially on our sister website: http://www.reattribution.com/with-profits-news/aviva-with-profits-another-annus-horribilis

Anxious to avoid further bad publicity they announced their revised reattribution offer with a stated minimum value for the Inherited Estate. In making sure the minimum wasn't breached, Aviva used derivatives to avoid this fate, an act which effectively saw the Inherited Estate miss out on one of the largest stock market rallies in history.
  
Their announcement on 12th January 2010 that the with-profits fund had performed so poorly was testament to the problems with-profits funds have with balancing the desire for stock market exposure with being able to meet policy guarantees. Other investment funds were gleefully buying the shares from with-profits funds who had effectively become forced sellers at low prices. Only when stock markets had recovered could they buy back the shares they had sold, at which point the shares were more expensive.

Policyholders will suffer in payouts in the future as a result. The Aviva with-profits fund returned just 6% in 2009 when Aviva's Distribution fund (an investment that might be suitable for a cautious to moderate investor much like a with-profits fund) returned 20%.

With-profits policyholders cannot recover this lost performance but they should note that a repeat of stock market falls leading to forced selling in the future should not be ruled out with the global economy far from out of the woods.

Added to the worry over further investment volatility is the startling fact that 57,000 policyholders have valuable guarantees that come in to play in 2010. We suspect this should be added to the large majority of the 33,000 policyholders who had such guarantees last year but waited for the reattribution payment and last Special Bonus before taking action. These valuable guarantees have to be met from somewhere. While in the first instance Aviva could call on the Inherited Estate that they have reattributed to shareholders, one could not entirely rule out the prospect of guarantee charges being applied to those who remain in an effort to recover lost funds.

2010 could be yet another annus horribilis and policyholders should review their with-profits policies carefully.