Endowment meltdown: Just one in 100 will pay off the mortgages they were meant to cover

Published 15th Jul 2009

More than three million home-buyers have been warned that their endowment policies are unlikely to pay off their mortgages.

Some insurers have just one in 100 mortgage endowments on target, a Money Mail investigation has revealed.

They include Standard Life, whose endowments were sold in huge numbers to homebuyers who borrowed from the Halifax in the Nineties.

In all, 735,000 policies, 98 per cent of its total, are likely to fail, while 1 per cent are in a perilous position, leaving just 7,500 on target.

With-profits endowments were supposed to build up a pot of money for investors over 25 years by adding 'bonuses' each year to the money saved, plus an extra big bonus at the end.

Homebuyers were told that this would smooth out any erratic stock market movements, ensuring their investment would meet its aim of repaying the mortgage and giving a lump sum on top.

Despite this, more than nine out of ten endowment policies run by Clerical Medical, Co-op, London Life, Friends Provident, National Provident Life, Aviva (formerly Norwich Union) and Scottish Widows are predicted to pay out too little to cover the mortgage they were supposed to repay.

More than 4.3 million mortgage endowments are still in force. The final figure for shortfalls might be higher than we suggest because some major endowment sellers such as Scottish Mutual and RSA (the former Royal & Sun Alliance) refused to disclose figures.

Insurers blame falling stock markets last year, but investors are asking what happened to promises to smooth out falls.

Many also want to know how endowments that were previously on target can suddenly fall far adrift only a few years before maturing.

Last year, for instance, only 19 per cent of Prudential's 164,000 endowments were at high risk of falling short. Now, that figure has jumped to 74 per cent.

At Co-op, the figure has leapt from 25 per cent to 95 per cent. The bad news comes in a year when a massive number of endowments are due to come to the end of their term.

Tax changes brought in 25 years ago abolished tax relief on monthly payments, and there was a 'buy while stocks last' sale by companies to encourage homebuyers to take out policies.

Aviva alone has 59,000 maturing this year and Standard Life 55,000. Prudential has 15,073 policies maturing, of which 4,025 are not expected to meet their repayment target. The expected average deficit is £1,130, while the expected average surplus is £3,000.

'The fall in the fund, down 15.8 per cent last year, has resulted in many policies turning red,' says a spokesman for Prudential. 'But the figures quoted are projections, and the final value won't be determined until an individual policy actually matures.'

Another reason for the rise in failing policies is that insurance companies devised a new way to lure homebuyers in the late Eighties and early Nineties by selling 'low-cost' endowments.

These demanded lower monthly payments from homebuyers, but needed greater investment growth to hit their targets. Nearly all of these endowments show a shortfall.

'There are three main problems with with-profits endowments,' says Professor David Blake of Cass Business School.

'The policies sold years ago promised returns of 9 per cent a year, but they have actually delivered much less than that.

'Second, policyholders who are still in the fund could well have subsidised the payouts of those whose policies matured years ago.

'Finally, the bonus policy of a typical with-profits fund has all the clarity of an actuary peering into a black box in a dark room.

'Investors have no idea how the bonus relates to the underlying performance of the fund.'

A Standard Life spokesman says: 'Many policies that were on target have matured, but the major factor has been the turbulent market conditions we have experienced in the past 18 months or so, for example, a drop of over 30 per cent in the FTSE All share Index in 2008 alone.

'These have had an impact on plan values and, in turn, on the number of policies not on target.'


WHY WE'RE SEEING RED

Under a traffic light system set up by the Financial Services Authority (FSA), life insurance companies must tell policyholders on a regular basis where they stand with their endowments.

Red means there is a high risk that your policy is not on track. The investment fund in which your monthly premiums are invested must rise by at least 8 per cent a year for the rest of the term to cover your mortgage.

Amber means there is a significant risk it's not on track and must grow between 6 per cent and 8 per cent a year. Green means your policy is on track, as long as it grows by 6 per cent a year.
CASE STUDY

Just a year ago, Terry and Mary Noel (pictured) from Greenford, West London, received a letter from Prudential telling them their endowment was due to pay out £76,400 - more than enough to cover their £74,000 mortgage.

But then in March, Prudential wrote to them again, predicting the endowment - which is due to mature in September next year - will pay out only £63,700.

'How can we lose nearly £13,000 in just seven months?' says Mary, a retired City computer analyst. 'Why were Prudential's predictions so far out? We have been through bad times in the stock market before, but I can't believe this has fallen so quickly.'

Mary, 59, and Terry, 69, a retired youth worker, were still paying £144 a month towards their endowment. They were told they could surrender the policy now and take £56,695. They did this, paid a lump sum off their mortgage and are now overpaying in the hope of clearing the debt quickly.

'We feel badly let down by the way they have managed this situation,' says Mary. 'It has left us about £21,000 short on our mortgage when just a few months ago we were told we could have paid off the whole thing.

'There was no telling if the market would pick up again before the endowment matured. For all we knew it could fall again, so we decided to take what we had.'

Source: ' Daily Mail '

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