User Agent: Mozilla/5.0 (Windows NT 10.0; Win64; x64; rv:78.0) Gecko/20100101 Firefox/78.0

Steps to reproduce:

1. create a policies.json
2. copy it into a directory called "distribution" within the Thunderbird installation directory
3. update Thunderbird with the installer

Actual results:

the file policies.json is deleted together with the folder distribution

Expected results:

the file should be retained

This is by design. But there is a command line switch to override, and disable the deletion.
See https://firefox-source-docs.mozilla.org/browser/installer/windows/installer/FullConfig.html - I assume these all also work for Thunderbird.
Does the disable work for you?

No, it doesn't work. For Firefox it works.

I wouldn't be surprised if other switches don't work.

I've tested now the switches "Thunderbird Setup 78.7.1.exe" /InstallDirectoryPath=C:\Program Files\Mozilla Thunderbird2 /RemoveDistributionDir=false /s. The switches /InstallDirectoryPath and /s works. The /RemoveDistributionDir switch doesn't work. I repeat this twice. Each time the folder distribution has been deleted.
With Firefox it worked with the same switches. Also repeated twice.

(In reply to australstrompetrel from comment #4)

I've tested now the switches "Thunderbird Setup 78.7.1.exe" /InstallDirectoryPath=C:\Program Files\Mozilla Thunderbird2 /RemoveDistributionDir=false /s. The switches /InstallDirectoryPath and /s works. The /RemoveDistributionDir switch doesn't work. I repeat this twice. Each time the folder distribution has been deleted.

Thank you very much australstrompetrel for testing and reporting back.
I have tested this for bug 1663391 and that's exactly what happens - the command line option /RemoveDistributionDir isn't working.
Let's see if we can get it fixed in bug 1663391.