Endowment agony for homebuyers
MILLIONS of homeowners are bracing themselves for the latest news on their endowments as insurance companies prepare to reveal how their with-profits* investment funds fared last year.
Over the next few weeks the giants of the insurance industry including Standard Life, Norwich Union, Legal & General and Prudential will reveal just how well - or badly - they have invested your money.
Policyholders, who have £316bn in with-profits endowments, pensions and bonds* might reasonably have expected increased payouts following last year's 20% plus returns from the stock market.
Instead insurance companies are warning that mortgage endowments are likely to pay out less this year than they did last year - partly because they are still licking their wounds from the previous three years' stock market falls.
Lower payouts mean even more homebuyers will be looking at massive shortfalls on their policies.
Even before this year's returns are announced, 80% of endowment policies are behind target. Soon, every single mortgage endowment customer with some companies will be in the red. Most insurance companies have slashed payouts on their 25-year with profits endowments by between 30 and 45% since they peaked in 1998, leaving homebuyers to make up massive shortfalls on their mortgages.
In real terms this means typical payouts on a 25-year endowment for £50 a month savings have fallen from more than £100,000 in 2003 to between £60,000 and £80,000 last year.
Yet these policies were sold with the promise that peaks and troughs in the stock market would be smoothed out.
Some 55,000 customers with Equity & Law (part of French- owned Axa) were told yesterday their with-profits endowment and pension payouts were being cut again.
Its benchmark £50 a month 25-year endowment now pays £51,799 - 14% less than the £60,373 paid at the start of last year and a massive 47% lower than its £97,497 payout in 1998.
Axa will announce cuts for the rest of its 500,000 with-profits savers in March.
NFU Mutual* recently cut payouts to its with-profits savers by 11%. Its 25-year benchmark endowment now pays £71,426 compared with £80,047 a year ago.
So why are payouts still being cut when all of the investments - shares, property and bonds - held by with-profits funds have made money in 2003? In fact, the FTSE All-Share* index gave a total return of 20.9% last year. Commercial property was up 10.7%, according to estate agent Knight Frank, while Yorkshire Building Society says major institutions* could have made almost 3.9% if they had left money in cash last year. The average corporate bond* fund turned in a healthy 4.56%, says data analyst Micropal.
Legal & General spokesman Peter Timberlake admits: 'It would take a sustained recovery over a number of years to result in a turnabout on payouts. People must remember that over the past three years when stock markets have fallen they have still had bonuses added to their policies.'
David Riddington, head of existing business at Norwich Union, argues: 'While the stock market did very well last year, the fixed interest investments such as gilts* and bonds didn't grow by as much. On a 25-year policy, you have to look at the whole investment period. There were very good investment returns in the late 1970s and early 1980s. All of these years will gradually be dropping out.'
A 25-year policy maturing last year would include investment returns from 1978 to 2002, and one maturing this year will include returns from 1979 to 2003.
Research by specialist magazine Money Management partly backs up this argument.
By far the biggest contributions to a policy maturing last year come from 1978 and 1979 because this money has been invested for longer and enjoyed the investment growth through the 1980s and most of the 1990s.
However the with-profits funds have not been helped by insurers who, with spectacularly bad timing, sold out of shares and put savers' money into poorer performing cash and bonds just as the stock market began to turn the corner.
On average less than a third of with-profits funds' money is now invested in shares. As a result savers are losing out.
The problem is particularly bad at companies that have shut up shop to new business. With-profits funds run by Alba Life, London Life, NPI and Pearl don't have a penny invested in shares.
Others including Eagle Star, Equitable Life, Royal Life, Scottish Equitable, Scottish Life and Sun Alliance have 20% or less in shares.
On the other hand Norwich Union had 54% in shares and property at the start of the year plus 7 to 8% in cash which gave it flexibility to buy more shares as the market turned. Alba Life savers have been told that they will not have any bonuses added to their money 'for the forseeable future', although its parent company Britannic Assurance has announced it will restart paying bonuses to its with-profits savers this year.
Brian Dennehy, director at independent financial adviser* Dennehy, Weller says: 'In theory some of these closed funds* should be able to pay some level of bonus.
'There has been a strong recovery in the stock market, but we need to look at the impact of some of these companies switching almost entirely out of shares.'
But there is better news for Prudential's 375,000 Prudence bond savers. Bonuses are being held at the 2003 level of 3.25%. The Pru will tell its other savers, including those with Scottish Amicable plans, what they are getting at the end of February.
Hugh McKee, a director at Prudential, says: 'What you can take from this is the strength of our with-profits fund and our ability to sustain our rates.'