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Around 6m insurance policies designed to pay off
mortgages are in real trouble - with home owners now facing a serious shortfall.
We look at the role lenders played in the selling of them. Report by Rupert
Jones and Tony Levene. Research by Nick Pandya
Rupert Jones, Tony Levene and Nick Pandya
Saturday May 18, 2002
Endowment sales hit the headlines again this week with the revelation that some six million endowments in Britain have little chance of reaching their target amounts, leaving homeowners facing large shortfalls on their mortgage repayment.
The number of endowments now in the most serious "red" category - where there is officially a high risk they won't grow by enough to pay off the mortgage - has more than doubled to 35% of the total compared with 15% last year.
Another 26% - more than 2.5m policies - are in the "amber" zone, which means there is a "significant risk" of a shortfall because they will need to notch up investment growth of 6%-8% a year to meet their target.
Since the beginning of 2000 the FTSE 100 index has fallen by a quarter, and unless there is a dramatic turnaround, millions of homeowners will be left holding endowments that will fall far short of the amount needed to pay off their home loan.
Many people will groan and curse when they open the so-called "re-projection letters" telling them they face possible shortfalls - in some cases running into tens of thousands of pounds.
While the focus has been on the insurers who provided the endowments, the mortgage lenders which actually sold people the problematic policies have to a large extent managed to keep themselves out of the spotlight of shame.
This week, Jobs & Money asked the leading building societies and banks responsible for selling huge numbers of endowments during the peak late 80s and early 90s period what they are doing to help their afflicted borrowers - and how much they have made in commission payments from their endowment sales.
Our research highlights how the sums of money it was suggested that endowment policyholders were likely to receive upon maturity were always going to be impossible to obtain. This is because these projected sums involved an estimate of charges which was just a fraction of the real level of fees taken from the policies.
The former building societies earned huge sums in commission payments from the sale of endowments. A typical policy would have generated around £1,000 in initial commission to the building society or bank which sold it.
All of the first year's premiums paid by the endowment buyer, and a large part of the second year's premiums, went straight into the pocket of the seller. But the commission bonanza did not stop there. On top of initial commission, the lender would typically have received what's known as renewal commission - a slice of every monthly endowment payment made by the borrower from then onwards.
One newspaper this week estimated that banks, building societies and financial advisers are still earning at least £125m to £150m a year in this way.
Needless to say, the information we were given in answer to our questions about how much they have raked in was scanty at best.
So we did our own digging and found that during the period 1988-89 alone - the peak of the endowment era, when an astonishing 2.1m plans were sold - the banks and building societies listed here pocketed more than £400m in commission payments.
The figures are taken from their 1989 report and accounts. They are for the total amount of "commission receivable" and include earnings apart from endowment commission, from selling things such as home and contents insurance. But it is likely that endowment commissions make up a large portion of the figure.
Rolled up over the years from the mid-80s until endowment sales tailed off in the mid-90s, it suggests that building societies may have raked in billions of pounds in commission - yet they have escaped almost scot-free from any liability to pay compensation.
Accountant Bryan Cooper, 56, from Conwy, North Wales is typical of the endowment victims who have contacted Jobs & Money.
He bought a £75 a month Scottish Widows plan from an IFA in 1992. It should repay £30,000 in 2012. In 2000 he was told it was "amber but almost green". Now, his plan is bright red. At 8%, it will return £23,200.
"It has only grown by 5.9% a year over the past decade when bonus rates were high. So I think the best we can hope for now is 4% which will give me £19,200 - £10,800 adrift and just £1,200 more than the premiums I'll have to pay."
Cooper says he is lucky in that he has spare cash so he intends moving to a repayment mortgage.
"I asked about paying no more and leaving it as paid up. I was quoted £11,300 at 4%. This is less than if I keep paying but I would have to chip in £9,000 to get £7,900 more. The surrender value at £7,507 is also less than the £9,000 I've put in."
"These policies were sold with the promise that they would comfortably achieve the required value," he adds.
What the building societies made out of it
Abbey was tied to Friends Provident for the sale of endowments between 1987 and 1992. It then sold them under the Abbey National Life brand. There are currently 180,000 Abbey National Life endowment policies in force. Customers getting letters warning them there may be a shortfall are being invited to meet a financial adviser. Abbey says: "People were not mis-sold endowment mortgages. It was always a case of 'the markets could go up or the markets could go down.'" Its 1989 report and accounts disclosed it received £95m in commissions from endowment slaes.
Birmingham Midshires says: "The responsibility for the performance of the endowment rests with the insurance company." The former building society is now part of Halifax. It is unable to supply figures detailing how many endowments its customers bought. According to its 1989 report and accounts it earned commissions worth £12.2m.
Alliance & Leicester
Alliance & Leicester was tied to Scottish Amicable for endowment sales between July 1989 and February 1996, when it stopped selling endowment mortgages. "We encourage people to seek independent financial advice and to speak to the endowment provider - Scottish Amicable," says A&L. "We don't have the details on their endowments. If you do find there is a problem speak to Scottish Amicable or speak to a financial adviser." Figures for commissions it earned in 1989 on endowment sales were unobtainable.
Halifax was one of the biggest sellers of endowments in a tie-up with Standard Life between 1989 and 1995. In total it sold 350,000 before switching to Pep/Isa-based vehicles instead. A spokesman said: "The commission we earned is a feature of the marketplace. We would never force someone out of their home because there is a small shortfall." Halifax's 1989 accounts show it earned £113m from commissions. It earns around £1m a year in renewal commission on its endowment sales.
Nationwide was tied to Guardian Royal Exchange from 1990 to 1995 for endowment sales. It then sold endowments under the Nationwide Life brand until 1999 when it ceased due to "low demand". The policies were sold by its staff in its branches, but it says: "We have no records of endowment sales on an individual basis as these were the responsibility of the insurers." Nationwide earned £109m in 1989 from "commissions receivable" according to its accounts.
Cheltenham & Gloucester
C&G sold endowments from an approved list - including Standard Life, Clerical Medical, Sun Life, Royal and Eagle Star - until 1988. It then tied to Legal & General until November 1993 when it ceased endowment sales - the first major lender to do so. Commission on endowments averaged £2.6m a year. Its 1989 accounts show it earned £18.5m in commissions from all sources.
Before 1990 the Woolwich sold the policies of several leading insurance companies. A spokesman for Woolwich Life, formed in 1990, said the company was "more than happy to assist customers with any problem they may have". Between May 1989 and October 1990 it was tied to Royal & Sun Alliance for the sale of endowments. It currently has around 75,000 mortgage endowments. Its1989 report and accounts showed it received £37.6m in commissions.
From 1987 to 1990, Britannia building society was an independent financial adviser. From 1990-1999 it sold 100,000 endowments through its own insurer, Britannia Life. Four-fifths are currently in shortfall, making it the worst performing life office. Britannic, a separate company, bought Britannia Life in 1999 and renamed in Alba. A spokesman says any compensation for mis-sold endowments must be paid by Britannic/Alba Life, and not the society. Its accounts for 1989 reveals income from fees and commissions of £17m.