Homeowner fury over Pru's late-notice mortgage shortfall

Published 24th Jun 2009

Homeowners depending on Britain's largest endowment provider, Prudential, to pay off their mortgages have been warned they face shortfalls, even though they have been on target for almost 24 years.

Just a year ago, Pru told these investors that their endowments were on course to meet their mortgages. But with a year or less to go before they must repay their mortgage, they have been warned of shortfalls running into thousands of pounds.

Pru's with-profits fund, along with those of other insurers, had an awful time in 2008, losing nearly one-fifth of its value. But policyholders argue that they were lulled into a false sense of security by letters they have received over the past few years assuring them that their endowments were on target.

Colin Pinner, 52, took out his policy in August 1985 to cover a £50,000 mortgage. Last year, he was told it was on track. If the endowment grew by 4 per cent he would get £51,100 when his plan matured in 2010. At 6 per cent he would get £53,800 and at 8 per cent, £56,560. The letter said that the most likely growth rate was 6 per cent.

But earlier this month, Colin, a self-employed personal fitness trainer from Bedfordshire, was told by Prudential that he faced a shortfall. If the plan grew by 4 per cent, he might get only £44,800. At 6 per cent (which the letter said was the most likely growth rate) he'd get £45,800, and at 8 per cent, £46,800.

The letter suggested he took action to shore up the shortfall. Colin, who used to work in the City, says: 'I just wonder what sort of action the Prudential thinks I can take with only 14 months to go until the plan matures.'

'My contention is they should never have sent out a letter saying I was on target so close to maturity if there was any doubt that there would be a shortfall. That letter lulled me into a false sense of security.'

A reader from Lancashire was left with a shortfall when his 20-year policy matured last month with a value of £26,842. It was meant to cover a mortgage of £30,000.

As recently as March 2008, he was told that his plan was on course and, at 6 per cent, it should pay out £31,000. He says: 'I requested a surrender value last year and was told I would get about £27,300. A year later, it has paid out £400 less than this, even though I had paid in more than £900 more in premiums. Getting a green letter last year encouraged me to stay put.'

With-profits investments are supposed to be smoothed. This means that profits from good years are held back to give investors some returns in the bad years. So, although the stock market has had an horrendous year - the FTSE 100 is down about 25 per cent a year - with-profits funds should have protected their policyholders from the worst.

Danny Cox from adviser Hargreaves Lansdown says: 'The Pru is probably the best of a bad lot of with-profits funds: but so much for smoothing! The whole point of these types of plan is that you have some predictability.

'It makes a complete mockery of the warning letter system. Policyholders could delay the maturity in the hope that the terminal bonus improves over the next year or so, but they might have to wait some time to do so, and in the meantime it could get worse before it gets better.'

Prudential's chief actuary David Belsham says that actually, smoothing has worked. 'Last year was exceptional in that all asset classes went down. It was a perfect storm.

The return on the fund was actually 19.7 per cent last year, but returns on those maturing now are 6 per cent to 10 per cent down on a year ago.' He says that the letters are sent out under Financial Service Authority rules and it 'cannot anticipate every move in the market'.

Of the 15,073 Pru plans maturing this year, 4,025 will not meet their repayment target.

There are 37,090 Scottish Amicable (part of the Pru) maturing this year. Of these, 20,800 will mature for less than their planned target. Currently, 94 per cent of Scottish Amicable policies are either red or amber. At Pru, it's 83 per cent.

Because of the fall in the value of the funds, any plans which were amber last year - which meant they needed a 6-8 per cent return - are now red, as are many of the plans which were previously green (which means they need a return of 4 per cent).

The latest edition of professionals' magazine Money Management details maturity payouts on all with-profits funds. On a 25-year policy taken out by a man aged 25 at inception, with premiums of £50 a month, a Pru policy maturing now would be worth £38,975. The average payout was £42,415 - but the lowest, £23,558, was from Life Association of Scotland.

Source: ' This is Money '

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