The Endowment Diary

The Endowment Diary

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The Endowment Mis-selling Debacle - one of the UK's worst financial scandals

Tuesday, July 26, 2005

Misery For Scottish Widows

Misery For Scottish Widows

Bad news for those of you who hold with-profits policies with Scottish Widows, the maturity values of these policies have fallen again; despite the recovery of equity markets.

The value of an average 25-year with-profits contract has dropped in the past six months, rather worrying given the fact that the stock market has been rising.

Scottish Widows said that payouts were lower because funds were invested over different time periods, yielding different earnings.

It still expects its £18BN with-profits fund to produce a pre-tax investment return of 15% in the 12 months to end-June, compared to 7.3% in the same period the previous year.

However, the company warned that maturity payouts could continue to fall, even in years where positive investment returns were achieved.

The Widows have tried to explain the reason for the fall as being due to the returns on with-profits, which aim to smooth payouts by holding back some of the return in good years to pay out in the bad, as being historically "significantly higher" than those of late.

To my simple view that means that they were paying out too much in earlier years, and not applying the "smoothing principle" properly.

Now there are two possible reasons for this:

1 Poor management of the policy

2 Deliberate over payment to attract new customers and shareholders

A typical 25-year endowment with Scottish Widows, maturing on 1 August, dropped 2.8% on February and 7.4% on the year. A mortgage-linked endowment over the same period fell 2.8% in value since February and 8.1% over the past year.

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