Fund investors can expect a lot less in their maturity payments than theirprojection charts predicted as providers continue to cut their annual bonuses, writes Laura Slattery.

With-profits funds are supposed to smooth out investment returns, shielding investors from stock market volatility.

But with-profits customers whose investments are due to mature in the next few years may well be feeling that they have had a bumpy ride and that the shrinking with-profits market has inflicted one unpleasant jolt too many.

One of the main providers, Hibernian Life & Pensions, has slashed the value of maturity payments again this year, taking further shavings off annual bonus rates.

Other providers, including troubled UK mutual Standard Life, are expected to follow Hibernian's example over the next few weeks.

Meanwhile, Standard Life has been told by the Financial Services Authority (FSA) in the UK to stop promising investors rates of return it may not be able to deliver.

An investment genre that has been extensively marketed to risk-shy investors has shown itself to be "a wolf in sheep's clothing", according to one financial adviser.

"Investors are understandably wary," says Mr Ian Mitchell, managing director of Deloitte Pensions & Investments.

The drops in annual bonuses mean that many of the projection charts showing how much money investors could get their hands on after a decade or more of investment are now looking less and less accurate in their predictions.

Bonuses have been on the way south for the past four years, calamitous stock market falls the reasonable explanation on offer.

But since March 2003, global markets have recovered, yet insurance companies still seem to be somewhat stingy when declaring their annual bonuses, making vague assurances that they will make it all up to investors later in the shape of a nice terminal bonus.

For example, Hibernian's with-profits fund made a gross investment return of 9.8 per cent in 2003, but maturity payments have been cut by up to 10 per cent on with-profits pensions and up to 7 per cent on endowments.

Hibernian said the positive return in 2003 was not enough to recover the losses suffered over the previous two years, during which unitised with-profits investors were awarded annual bonuses of 6 per cent and 5 per cent.

Hibernian will have to make up both the investment losses and the cost of bonuses before investors' policies mature.

If they don't, terminal bonuses and the resulting maturity payments could end up being very paltry indeed.

The falls in payouts are already stark.

On a typical €150 a month Hibernian personal with-profits pension, the maturity payment after 20 years will be €118,535 in 2004 - €17,000 less than maturity payments made last year and over €40,000 less than payouts made in 2002.

A typical €75 a month 25-year endowment policy will pay out a maturity value of €93,041 in 2004, down from payouts of €100,474 in 2003 and €118,196 two years ago.

Annual bonuses on Hibernian's unitised with-profits business, including its Celebration Bond, have now dropped from 3.5 per cent to 2 per cent for policies taken out between 2001 and January 13th, 2003.

The Hibernian rates are probably about as good as it is going to get, according to Mr Mitchell.

However, bonus rates are now so low that they do not mirror the level of risk involved in any with-profits contract, he says.

Unitised with-profits contracts were designed with double-digit annual bonuses in mind, Mr Mitchell says.

In an environment, where bonuses are closer to 0 per cent, the "drag" of a 1 per cent annual management charge on a with-profits fund is now much more detrimental.

There is, he adds, an "over-reliance" on potential terminal bonuses to prop up the return. "These terminal bonuses have also been savagely reduced in recent times."

So is the with-profits market simply going through a bad patch or is it in terminal decline?

According to financial adviser Mr Liam Ferguson of Ferguson & Associates, lump sum investments into with-profit bonds are "substantially down" on a few years ago.

"This is despite the providers' best efforts to reassure potential customers by opening new with-profit funds for new investments, thus eliminating any perceived 'black holes' in their funds," he says.

Low-risk investors are now opting for tracker bonds, Mr Ferguson believes.

"Despite their lack of transparency on charges and sometimes downright misleading marketing on potential returns, tracker bonds are still more transparent than with-profit funds in terms of what the investor's return will be."

Less risk-averse investors are returning to managed funds and equity funds in order to benefit from any market bounce.

One reason why the spoils of the market recovery may not accrue to with-profits investors is the fact that some providers strategically cut the proportion of the funds normally invested in equities, some to less than 40 per cent.

While this may have protected with-profits funds from further potential losses, it will also have made it more difficult for some funds to recover from their underwater state.

The real issue is the expense of providing a guarantee, according to Mr Nigel Dunne, sales and marketing manager for Standard Life Ireland.

"It's been extremely difficult to come up with something that gives a cast-iron guarantee to the customer and has good potential for an upside," he says.

Unlike other with-profits policies, there are no guarantees built into Standard Life's with-profits fund, which acts more like a smoothed managed fund.

As Standard Life is still a mutual company, it pays mutuality bonuses alongside discretionary annual ones.

But the company has more or less been forced by the UK regulator to stop projecting forward these bonuses in policyholders' illustrations.

This means that Standard Life's 65,000-plus Irish with-profits policyholders will see the 0.5 per cent per annum mutuality bonus wiped from their illustrative projections.

The company must also shore up reserves to cover guarantees it has made to some policyholders and analysts have suggested it may have to cut the equity content of its with-profit fund.

More bad news is expected soon.

Standard Life is due to announce cuts in bonuses in line with the rest of the market in February, following an average 15 per cent cut in maturity payments this time last year and a further average 6 per cent reduction last August.

With-profits providers defend the investment, arguing that their smoothing nature protected investors from the worst effects of market plunges.

"The numbers are still very good value compared to unit-linked business," says Mr Ian Veitch, marketing and product development director for Hibernian Life & Pensions.

"Very few people who receive a maturity cheque are complaining. It's been a very good investment for them," he says.

"With-profits still works. It's not for everyone, but then no investment is for everyone," Mr Veitch adds.