Call For Evidence

Call For Evidence

In a move designed to ensure that another endowment related scandal does not occur, the Treasury Select Committee has called for written evidence as part of its inquiry into the orphan assets (Inherited Estate) held by life companies' with-profits endowment funds.

The call comes as concerns are raised over the actions of AXA, Prudential and Norwich Union as they attempt to re attribute their Inherited Estates.

These assets are worth billions of pounds yet, despite these funds being contributed by policyholders, some insurance companies have been using a portion of them for the benefit of their shareholders rather than policyholders.

In 2000 AXA paid out a paltry 31% of its inherited estate to policyholders, this gave rise to the FSA to creating the post of Policyholder Advocate.

Claire Spottiswoode, Policy Advocate, is currently acting on behalf of Norwich Union policyholders.

Ms Spottiswoode, who is not happy with the current plans by Norwich Union (eg to pay the policyholders their share over 3 years), has welcomed the call for evidence:

"Foremost among the issues will be the way in which the FSA allows companies to subsidise the writing of new business, which has the effect in a re attribution of transferring value from the estate directly to shareholders.

Further, the way in which the FSA allows companies to pay shareholder tax from the estate is costly to policyholders and requires explanation."

The committee would like to hear about the following areas:

• The regulatory definition of the inherited estate in a with-profits fund.



• The extent to which life assurance companies should be permitted to diminish inherited estate in order to subsidise corporate activity, including financing new business, making strategic investments, paying shareholder tax and paying the costs of compensation for mis-selling.



• Whether allowing life assurance companies to use inherited estate to subsidise corporate activity has any adverse effects on competition.



• The principles that should guide the division of inherited estates in 90:10 funds between policyholders and shareholders upon re attribution of the estate.



• The appropriate sharing of inherited estate between current and future policyholders.



• Whether policyholders' reasonable expectations of distributions from inherited estate should be zero or have a positive value.



• Whether any distribution of benefits from the inherited estate should be made in a single payment or phased over several years.



• The role and responsibilities of the Policyholder Advocate.



• The framework for negotiation between the Policyholder Advocate and the life assurance companies.



• The role of the with-profits committees of life assurance companies.



• The approach of the Financial Services Authority to the issue of inherited estate.

Written evidence should be sent to the committee at this address Parliamentary Committee.

The List of Shame

The List of Shame

Congratulations to Money Management magazine for naming and shaming the insurance companies and endowment providers, who tired to hoodwink their customers, that the Financial Services Authority (FSA) tried to cover up.

When these shamed companies sold their products to their unsuspecting customers they used industry standard charges laid down by Lautro, the industry regulator at the time, to show the returns etc that would be expected on the policies..

However, their actual charges levied by these shamed companies were often much higher sometimes double the Lautro rate. Needless to say, they chose not to tell their customers this. This shoddy practice took place between 1988 and 1995.

It is estimated that around 200,000 policyholders, with low-cost mortgage endowments, could be owed up to £200m by these companies as a result of this practice.

The list of shame includes:

-Standard Life
-Pearl
-Axa
-Scottish Widows
-Prudential, owned Scottish Amicable
-Scottish Mutual
-Scottish Provident, now owned by Resolution.

Companies were taking up to 0.75% a year in charges from the fund. However, their customers were given the impression that the charge was only 0.3% (ie less than half).

Some companies, including Axa, Legal & General and Clerical Medical, have set aside money to make good these shortfalls. Others, such as Standard Life, have so far refused.

Shoddy practice by a very shoddy industry, and a disgraceful attempted cover up by a toothless partisan FSA.

It is hardly surprising that the British consumer has lost all faith in the financial services industry.

A Slice of The Pie

A Slice of The Pie

Standard Life has promised its two million policyholders a windfall payout from its £1.3BN orphan fund pot, surplus cash held in its with-profits fund.

Standard Life said that it would pay the cash to qualifying policyholders as their policies matured, rather than paying out one lump sum to all its customers in one go.

The orphaned assets are pots of surplus cash that inflate insurers' solvency figures.

Aviva, parent company of Norwich Union, will divide its £4BN orphan assets between shareholders and policyholders and Prudential is also considering what to do with its pot of surplus assets, worth £9BN.

A Standard Life spokesman told The Times:

"When other insurers, such as AXA, distributed their orphan assets, they made a one-off payment to all policyholders.

We are taking a different approach and are giving enhanced payouts when a policy reaches maturity, or when it is surrendered or transferred.

We are doing this because we want to retain some of this cash cushion over the life of our policies, some of which have decades to run."

This approach means that investors will be forced to keep their policies until maturity, if they wish to receive their share of the pot.

Standard Life "Merely Following Orders"

Standard Life "Merely Following Orders"

It seems that Standard Life is getting rather a rough press these days, over its endowment policies.

Standard Life is now facing calls to compensate up to 100,000 mortgage endowment holders, for failing to disclose the full extent of charges levied on their endowment policies.

The hapless holders of their Homeplan policies are now facing 12% shortfall on their policies, because of a charging discrepancy.

Which? is leading the calls to compensate victims of this debacle; other companies (Norwich Union, L&G, Scottish Widows and Axa) which sold policies, with similar charging structures, have topped up their own clients' investments.

Standard Life used "standard charge projections", specified by the regulator, to calculate its premiums. However, the actual charges were up to 10% higher.

Standard Life claim that they have done nothing wrong.

A spokesman said that they were merely following industry guidelines at the time.

Doesn't that, "merely following orders", have a familiar ring to it?

Standards Life's Endowment Debacle

Standard Life's Endowment Debacle

Further to my earlier article about Standard Life's failing Homeplan endowment policy, it seems that the shortfalls on this useless product will be more than previously thought.

It seems that the value of many of the company's Homeplan policies, sold in the early 1990s, could be as much as 12% lower than the amount originally estimated.

It is estimated that the losses could exceed £250M.

The reason?

Standard Life set its premiums at an artificially low level in order to attract new business.

Standard Life are continuing to reject demands that the company compensate those who face shortfalls.

Well they would, wouldn't they?

A Standard Life are quoted as saying:

"At the time it was launched, Homeplan was an innovative and popular product. The innovative flexibility offered by Homeplan meant it was an immediate success and helped tens of thousands of people onto the property ladder."

Not much comfort to those facing a shortfall now though is it?

As I have repeated, time and time again, what is the point of an endowment policy if it is not going to pay off the mortgage?

People would not have taken these useless policies out if they didn't think that they would work.

In other words, it is the duty of the life assurance companies to underwrite these policies.

Standard Life are keen to blame the independent financial advisers (IFAS) for their mess. They are reportedly saying that the way the product was designed meant that IFAS, who were responsible for selling Homeplan policies at the time, could themselves decide the level of premiums that their clients should pay.

Janet Walford, editor of Money Management, politely says that this is of course bollocks:

"This just does not seem logical to me. Life offices price their policies on complex actuarial assumptions, including underwriting risk, assumed performance and charges. How would an IFA know what to charge? It's madness."

Other life insurers, have realised the error of their ways and have quietly paid compensation to their policyholders in a similar position.

The list of recalcitrants includes; Scottish Widows, Axa, Clerical Medical, Legal & General, Norwich Union and Canada Life.

Time Bar To Bring Chaos

Time Bar To Bring Chaos

Life assurance companies, who sold underperforming and useless endowment policies to 8 million home owners, are using a number of methods to reduce the claims being made against them for compensation.

One such method is the time bar, whereby claimants are given a deadline to complain or lose their right to do so for ever.

This neat little trick is allowed by the Financial Services Authority (FSA), which said that an insurer may disregard a case for mis-selling three years after a policyholder receives the first "red" letter warning that an endowment has a high risk of not meeting its target.

Needless to say, there is now a deluge of complaints swamping the system.

Many hundreds of thousands of red letters were sent out in early 2003, this means that the deadline is now fast approaching for these people to make a claim.

The deluge has been further exacerbated by the fact that the FSA has told the life assurance companies that they must remind people 6 months before the final deadline, as to their right to make a claim.

Needless to say the life assurance companies and the Ombudsman will be hard pressed to cope with this deluge of complaints.

It has taken me over two years to reach the final stage of my claims which, for the record, were both rejected.

Simply put, the system can't cope!

This problem is exacerbated by the fact that, according to Chief Ombudsman Walter Merricks, 45% of endowment mis-selling cases were upheld by his office after being turned down by life companies.

These companies are reportedly issuing time bars:

Norwich Union - it has 1M endowment policyholders. It began warning of a time bar last October, giving 12 months' notice.

Standard Life - it has 1.2M endowment policyholders. It will write to customers in coming weeks to remind them about its deadline, giving 12 months' notice.

Royal & SunAlliance - it has 450K policyholders. It began reminding policyholders about time-barring last May and gives policyholders six months to complain after a second red warning letter.

Allied Dunbar/Eagle Star - it has 100K policyholders. Policyholders have 12 months to complain after receiving second letter.

Friends Provident - it has 450K policyholders. They have imposed a three-year time bar after policyholders receive their first red letter.

Pearl/NPI/London Life - it has 100K policyholders. Time barring applies three years after the first red letter.

Axa - it has 160K endowment policyholders. It introduced time-barring last month and is writing to customers giving 12 months' notice.

Scottish Widows - it has 165K endowment policyholders. It introduced time-barring in February, giving customers 12 months to complain after receiving their second red letter.

Good luck!

Bonuses Cut

Bonuses Cut

More bad news for the hapless holders of underperforming, and useless, endowment policies.

Axa Equity & Law has announced that it will be halving the annual bonus payments on its with-profits policies from a pathetic 2%, to a derisory 1%.

That is less than inflation, and certainly less than you would get for leaving your money in a savings account.

Legal & General (L&G) has cut interim bonuses on some of its with-profits bonds from 3.5% to 2.75%.

Prudential is maintaining its annual bonus payouts on its Prudence Bond, at 3.25%.

The Actuarial Profession are reported to have said that, despite rising equity markets, bonus payouts "are continuing to fall and are set to do so for a number of years yet".

Three Cheers for Liverpool Victoria

Three Cheers for Liverpool Victoria

Liverpool Victoria, the UK's largest friendly society, announced this week that all of its currently maturing mortgage endowment policies would receive a surplus on top of the mortgage amount covered.

In other words, those who hold endowment polices with Liverpool Victoria will receive a small profit over and above the mortgage.

Malcolm Berryman, Liverpool Victoria's group chief executive, said:

"The strong performance of our with-profits fund has ensured a surplus for all of our mortgage endowment policies that have matured or are currently maturing..In addition, our unconditional guarantee gives total peace of mind to our members for the future...."

Liverpool Victoria confirmed that none of its 6,000 mortgage endowment policyholders will suffer a shortfall, whatever happens to future investment returns.

It has made a financial provision to cover this guarantee, this will not have any adverse impact on future financial performance.

Now let us compare this excellent piece of news, with the dismal announcements made by the life assurance industry recently.

• AXA has announced that it will be reducing their payouts



• Standard Life will reduce its payouts to its 2.4M policy holders



• The Actuarial Profession, the body which represents those who run with-profits funds, has warned that the majority of customers will face falls in value of their policies for several years to come

Now it is not unreasonable to ask, how is it that one company can actually generate a profit for its policy holders; whilst the others only seem to be able to generate losses for their hapless endowment policy holders?

After all, they have all faced the same declining stock market!

The answer lies in the manner in which the companies manage their funds. Liverpool Victoria were more cautious when it came to paying out vast annual bonuses, in years of high returns.

They understood the concept of "with profits", namely that the profits made in one year should be used to smooth returns in the years of poor performance.

Unfortunately, it seems that many other "big names" in the "profession" chose to go for big bonuses in order to attract customers.

Needless to say, famine follows feast; when the stock markets started to fall, and with it investment returns, these companies that had paid out super inflated bonuses had nothing left in the cupboard to smooth things over with in the lean years.

I would argue that, in addition to persuing these companies for "mis-selling" polices, people, the FSA and the Treasury Select Committee should be going after them for mismanaging the funds.

After all if one company can produce a surplus whilst operating in the exactly the same market, why couldn't the others?