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Insurers own up finally to endowment meltdown

Most policies designed to pay off mortgages will leave homebuyers seriously short. Rupert Jones reports on an ever-deepening crisis

Saturday January 31, 2004
The Guardian

A crisis affecting millions of homeowners deepened this week when several leading insurers admitted that the vast majority of their mortgage endowment policies are struggling to meet their target amounts.

The companies - including Norwich Union, Standard Life and Prudential - were asked by MPs to give comprehensive figures showing precisely how many policies look very unlikely to pay off people's mortgages.

They were also asked how many are still on track, and what the average shortfall is. The answers made for pretty grim reading.

After years of persistently refusing to disclose its shortfall figures, one of the biggest endowment providers, Legal & General, was finally forced to reveal how its policies are performing.

In a letter to MPs, L&G said a whopping 55% of its endowments (that's 470,000 policies) are in the "red" danger zone, where there is officially a high risk that they will not grow sufficiently to pay off people's home loans, with a further 20% (170,000 policies) in the so-called amber zone, which means there is a "significant risk" of a shortfall.

Serious as that is, the position at some other insurers is even worse. The figures emerged as the bosses of five insurance giants were being castigated by MPs for their role in the mortgage endowments crisis.

During the past few years millions of homeowners relying on endowments to pay off their mortgages have received letters from their insurers warning that the policies may not produce enough cash. Some have been told their policies are likely to fall far short of the amount needed to pay off their mortgages.

Policies fall into one of three colour-coded categories: red, amber and green. If you're lucky enough to have received a "green" letter, your policy is currently on track.

Endowments classed as red will fall short unless the policy delivers an annual investment return of more than 8%, which is considered highly unlikely. If your policy is amber, that means it will only pay off the mortgage provided investment growth of 6% to 8% a year is achieved.

While many other companies have made no secret of their red/amber/green figures, Legal & General has for years doggedly rebuffed requests for it to disclose this vital data. But when MPs from the Treasury select committee came knocking on its door, L&G clearly felt it couldn't fob them off too. We were passed the figures and L&G duly confirmed them as correct.

L&G's figures show that only 25% of its endowment policyholders (210,000 policies) have received a green all-clear letter.

But, to be fair, this isn't as bad as some of its rivals. Embattled Standard Life revealed that the proportion of its 1.2 million mortgage endowments in the red has risen to 73% (876,000 policies), with another 13% amber, while Royal & Sun Alliance dis closed that 81% of its policies (407,825) are in the red. Norwich Union (which includes policies sold under the General Accident and Commercial Union brands) said 39% (468,000) of its policies were red, with 48% amber.

However, some of the companies were keen to point out that many of their endowments were sold by independent financial advisers, and if duff advice was given, in those cases it's the adviser and not the insurer who was responsible, they say.

At this week's Treasury select committee hearing, the insurers also revealed just how many miss-selling complaints they have been receiving from unhappy policyholders.

Standard Life's new chief executive Sandy Crombie told MPs that about one in 10 endowment policyholders had lodged a miss-selling complaint, and it was upholding about 90% of these complaints in favour of policyholders. He admitted that when the company examined the original sales records, it had found that some of the paperwork was "somewhat inadequate".

Norwich Union boss Richard Harvey said that it was finding in favour of the complainant in about 50% of cases. He was surprised to see that complaints to his company had increased ten-fold to hit 15,000 last year. But he didn't believe there had been "substantial miss-selling".

Four things that you can do

So what can worried policyholders do?

If the endowment backing your mortgage looks like falling well short of the target amount, and it is still some way off maturity, you should perhaps consider switching part or all of the mortgage over to a repayment loan.

If you can afford to switch and continue with the endowment as well, that is probably the ideal solution.

Or consider making extra payments into the mortgage - that is, to the lender, not the endowment - to reduce what you owe.

Many lenders allow borrowers to make overpayments without penalty. Others, however, will sting you. Remember that if you decide to get rid of your endowment, you must either switch to a repayment mortgage or set up another savings scheme.

You can also make the policy "paid up". This means you stop paying the premiums. It will still mature on its set date and you will receive bonuses on what you have paid in.

How they shape up

Norwich Union (includes policies sold under the General Accident and Commercial Union names):

Red 39% (468,000 policies)
Amber 48% (576,000 policies)
Green 13% (156,000 policies)
Average shortfall: £5,650

Standard Life

Red 73% (876,000 policies)
Amber 13% (156,000 policies)
Green 14% (168,000 policies)
Average shortfall: £4,900

Legal & General

Red 55% (470,000 policies)
Amber 20% (170,000 policies)
Green 25% (210,000 policies)
Average shortfall: £6,700


Red 44% (85,000 policies)
Amber 32% (63,000 policies)
Green 24% (46,000 policies)
Average shortfall: £3,400

Scottish Amicable

Red 48% (344,000 policies)
Amber 34% (237,000 policies)
Green 18% (129,000 policies
Average shortfall: £5,100

Royal & Sun Alliance

Red 81% (407,825 policies)
Amber 6% (30,471 policies)
Green 13% (65,183 policies)
Average shortfall: £7,000

Red = officially a "high" risk that the policy will not grow sufficiently to pay off the mortgage

Amber = a "significant risk" of a shortfall

Green = policy is on track to hit the target amount


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