| Why pay-outs couldn't
Buyers of endowments could never hope to achieve the pay-outs promised, write Patrick Collinson and Francis Shennan
Patrick Collinson and Francis Shennan
Saturday May 18, 2002
Buyers of endowments could never hope to achieve the pay-outs promised. However, this is not because of falling stock markets - the excuse peddled by endowment companies - but because the amount the companies took in charges were far higher than they told customers at the time, Jobs & Money research has revealed.
During the period when millions of endowment policies were sold, at the peak of the late 80s property boom, insurance companies routinely projected forward the benefits of the endowments, assuming that only 0.3% a year would be lost in charges.
But the real amounts were often four or five times higher. Remarkably, the persistent under-estimation of charges - and over-estimation of future returns - came with the blessing of the industry's regulator at the time, Lautro.
"It was a period of absolute lunacy," says Janet Walford, editor of Money Management magazine, who campaigned against the system until it was abandoned in 1995.
"The regulators were probably got at by the vested interests in the industry at the time. You absolutely had to stick to the projections. By the early 90s it was looking mad. We refused to show the standardised projections in the tables in our magazine because 99% of the companies had higher charges than the projected levels."
However, Lautro capitulated in 1995 and since then insurance companies have had to reveal their real charges.
One victim of projections which did not reveal the true charges was police sergeant Ramsay McArthur, based at the High Court in Glasgow, and his wife Eileen, who took out a Mortgage Manager Endowment Plan in October 1994 with Manulife Financial, now Canada Life, to cover a £28,000 mortgage.
They paid premiums of £59.71 a month after being shown projections which over 25 years would give them a maturity value of £55,600 (assuming growth of 10% per annum) or £23,600, assuming growth of 5%.
"It was reasonable to assume the policy would pay out enough to pay off the mortgage and have some money left over," he says. At first it seemed to perform reasonably well. He was told the fund was increasing at 7%-8% a year. "On my calculations it made the policy worth approximately £40,000," he adds.
So he was astonished to receive a letter from Canada Life in October 2000 warning of potential shortfalls of between £3,700 and £16,800.
What's more, a new projection of 6% growth a year produced a figure that was lower than the 5% projection figure used six years earlier. It now estimated a final pay-out of £16,700 - less than the £17,913 due to be paid in premiums.
"We were shocked and devastated," said Sergeant McArthur. "There is no way we would have taken out a policy which was going to return less than the payments."
What were not included in the original projections were the real charges, as revealed in an email from Canada Life to Financial Ombudsman Scheme adjudicator Andrea Richards.
Lautro, the regulator at the time, assumed a 0.3% annual management charge; Manulife charged four times more at 1.25%. Lautro assumed a flat 75p monthly expense deduction; Manulife charged £1.54, increasing in line with inflation. Lautro also assumed "various other lower expenses".
The adjudicator said that instead of the 5.7% annual growth that would have been needed to repay their mortgage using Lautro charges, it would in reality have required 8.75% annual growth.
She decided that Canada Life should make up the premiums to date, taking the real charges into account, but that from the date of settling the complaint, the McArthurs would have to pay extra. Canada Life calculated an £18.29 increase in the premium to £78.
"It would cost me a further £3,840 in premiums, making my total payments approximately £21,750," said Sergeant McArthur, who is unhappy with the adjudicator's decision. "Canada Life should make up any shortfall to produce the return illustrated by them at the time of the sale."
A spokeswoman for Canada Life said: "I understand
Sergeant McArthur is now planning legal action. Until we receive his
claim, we are unable to comment further."