Aviva warns of shortfall in 88% of its mortgage endowments

Published 13th Jan 2010

Aviva cuts payouts after poor returns from with-profits fund


Aviva has announced further cuts to payouts on 25-year mortgage endowments

Britain's biggest insurer today warned there was a high risk that nine in 10 of its mortgage endowment policies would not pay off customers' home loans, despite last year's strong stockmarket performance.

Aviva (formerly known as Norwich Union) also announced fresh cuts to payouts on 25-year mortgage endowments after disclosing that its main "with-profits" fund notched up an investment return of 6% in 2009 – a long way short of the 22% rise achieved by the FTSE 100 index.

The figures are likely to disappoint some of the company's 2.1 million with-profits customers, who will have been hoping last year's gains would feed through into better payouts.

However, Aviva said the vast majority of those who had invested in its with-profits funds had enjoyed better returns than if they had put their money in an average savings account, and had also been protected against the full impact of volatile investment markets.

The company has around 700,000 mortgage and savings endowment policyholders, 900,000 pension plan holders and 500,000 people with investment bonds.

It said 88% of the group's mortgage endowments were now in the "red" zone, where there is a high risk they will not pay off the home loan they were bought to cover, while a further 8% were "amber", signalling a significant risk of a shortfall. Just 4% were "green" – meaning they are on track to reach their target – compared with 6% a year ago.

While the company said today that the "vast majority" of regular bonus rates had been maintained, holders of 25-year mortgage endowments maturing now are still getting less than those whose policies matured six months or a year ago.

A typical maturing £50-a-month, 25-year General Accident policy will from this month pay out £36,979. This compares with the £38,776 an equivalent policy was delivering last July, and the £42,322 which someone with a policy maturing in January 2009 would have received.

But David Barral, Aviva's chief operating officer, said: "Although many endowments are not on track to meet the original target amount, we believe most customers have already taken action to cover any shortfall."

Last week, financial services provider Hargreaves Lansdown estimated that the average UK with-profits fund grew by around 14% over the last year, although it pointed out that individual performance would depend on the particular mix of underlying assets – shares, bonds, property etc – in each fund.

However, it warned that with-profits funds "hold back returns from the good times to smooth out the bad times", so investors would not enjoy the full extent of the stockmarket recovery seen in 2009.

At the end of 2009, shares and property made up 57% of Aviva's main with-profits fund – up from 48% in April last year.

Last week, there was some rare good news for Equitable Life policyholders when the troubled insurer announced it was increasing the value of with-profits pension plans by 5.5% after deciding to reintroduce interim bonuses.

Investors will get an interim bonus of 3.5% and a one-off increase of 2% to their policy's value.

Source: ' Guardian '

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