Investors in the crisis-hit AIG Life Enhanced fund have been told that, due to interest rate cuts, maximum returns from the fund’s recovery investment vehicle may be “greatly reduced.”

When the AIG Life Enhanced fund closed in December, investors were told that if they cashed in their holdings immediately they stood to receive 87 per cent of their total investment - 95 per cent of investors in the fund opted to transfer their assets into a Protected Recovery Fund that would mature in 2012.

AIG had planned to distribute over half of the Protected Recovery fund’s assets before 2012.  But now, falling interest rates are affecting the return AIG Life is receiving on certain fixed income assets, and so these distributions could be greatly reduced – as could the fund’s maximum returns.

In a newsletter to policyholders, AIG said: "The low interest rate environment we now find ourselves in does present some challenges to the Protected Recovery Fund. The first is that the coupons received by the fund will be much lower and this means that the maximum returns from the fund will be greatly reduced if interest rates remain at current levels."

It continued: "Also, with poor returns available on fixed interest investments we will now need to invest a much higher proportion of the fund's liquidity until the fund maturity date to ensure that the guarantees can be achieved. This in turn has a knock on effect to the distributions and will mean that we will have much less to distribute prior to maturity on 1 July 2012 - it could mean that distributions are modest or possibly nil, although the actual amount we distribute will depend on a number of factors including future interest rates, default rates, withdrawals and market valuations."

The AIG Life Enhanced fund was initially suspended in September 2008, after AIG’s bailout by the US government sparked a rush of redemption requests.

Disgruntled investors in the fund subsequently formed an action group, AIG Victims, and appointed legal representation.  At the end of last year, a spokesperson for the group told WealthBriefing its members say they were mis-sold the fund and that there are a number of legal actions in the pipeline. 

In December, prominent UK businessman Sir Keith Mills launched a high profile attack on Coutts after the private bank allegedly advised him to invest in the fund.