More Doom and Gloom

It seems that shortfalls on endowment mortgages are likely to be worse than currently projected by life assurance companies.

The problem lies with the asset mix. Most of the major insurers have switched the majority of their holdings from equities and property, into assets with a lower rate of return.

Life insurers are now forced to publish far more detailed information about their investment strategy, and charges levied on their with profits funds.

However, these disclosures (called entitled Principles and Practices of Financial Management) do not require companies to disclose in full the asset mix of their funds. As usual, something that is "too little, too late".

In addition to disclosing their asset mix, life insurance companies are now disclosing that they are introducing additional charges to back up their guarantees.

Norwich Union will charge customers in the Norwich Union Life and Pensions with profits fund an additional 0.75%, and CIS will charge an extra 0.5%.

Ever felt like you were being screwed both ways?

Taking the above into account, it is unlikely that the so called "projection letters" dropping onto your mats over the coming months are accurate.

We, the holders of these failed endowment schemes, are just meant to sit and watch these companies try to bury their heads in the sand; and avoid telling us the truth about how bad things really are.

Pathetic!

The Association of British Insurers has announced that it is revising its industry code of practice on endowment mortgages.

It will provide more, and better information, for consumers to help them take prompt and appropriate action if they are faced with a potential shortfall on their endowment mortgage.

All very well, but time is running out.

Bad news for the 1.5M people holding endowment mortgage policies with the Norwich Union.

Reports indicate that the Norwich Union will be cutting their returns by 0.75%.

This cut is ensure that the guarantees made by Norwich Union, which promise that the policy will be worth a minimum amount on maturity, will be honoured.

Norwich Union expects returns of between 4.5%-6% a year after tax.

Doubtless other life insurers will be delivering bad news as well.

I understand that some of the UK's actuaries have taken a dislike to the Treasury Select Committee's investigation into the endowment policy mis-selling scandal.

They have branded it a "circus" after a heated and aggressive hearing. What is aggressive to some, is critical analysis to others.

My message to the Select Committee is simple; "keep up the good work!".

It seems that endowment letters, currently being sent to the hapless owners of the failing endowment mortgage policies, may not reflect reality.

The ConsumersÂ’ Association is worried that the calculations that may not reflect the true financial position.

The letters that will be dropping on peoples' floors shortly, will show that the expected shortfalls have increased. However, because unrealistic returns of 6% are being used in the calculations, these figures are more than likely too optimistic.

The current asset mix held by life assurers is more heavily weighted towards bonds,whichh have a 4% yield.

Hardly good news for the hapless home owner with an endowment mortgage.

Don't despair the FSA says that it is keeping its eye on things.

Well that's alright then, isn't it?

According to today's FT, more than 75% of endowment polices will not meet their target.

See full article here.

What a bloody mess!

Marginally off topic, but related to my earlier post about Abbey, there is a rumour doing the rounds of the City that Abbey National may be subject to a takeover bid by Spain's Santander bank.

This morning Abbey's shares rose 5%.

Maybe here is a possible solution to those of us facing shortfalls on our endowment mortgage policies.

Hedge the expected loss, by buying shares in banks and insurance companies (the same organisations that mis-sold the endowment policies) that may be subject to takeover bids.

Note, I am speaking with my tongue "firmly in my cheek". This would be a high risk strategy, which would quite likely lose even more money than the shortfalls predicted on the endowment policies.

Remember, when making an money related decision, always take the advice of a suitably qualified independent financial expert and lawyer.

I understand that Abbey is trying to avoid responsibility for mis-selling endowment policies pre April 1988.

Their rationale being that before the Financial Services Act took effect in April 1988, there were no rules covering endowments.

However, there is a voluntary agreement whereby banks are supposed to take responsibility for investment products they sold before April 1988.

Abbey happily argues the point that it was under no obligation to inform borrowers about any risks, it was in their view the role of the endowment company to explain the risks.

How very helpful of them!

Needless to say, if it wins this argument, it will not have to pay compensation for endowment policies mis-sold before April 1988.

It certainly needs all the financial help it can get, as over the last two years it has lost over £1.5BN.

It may be that the Financial Ombudsman Service takes a different view.

In my view, do not "lay down and die" just because your IFA has fobbed you off with the "Abbey excuse"; take it to the Ombudsman.

I understand that the Financial Services Authority is under pressure to reduce the mid range projection rate of 6% per year, which it has been using for the last 5 years.

Leading insurers are worried that the rate is unrealistic, and have themselves reduced their projection rates to around 5.5%.

The FSA is reviewing the rates and how they are calculated, a reduction in the rate will give rise to a whole new flurry of red letters warning of shortfalls.

This of course is an entirley academic exercise, the only sure measure is the day the endowment policy ends; and the difference between the endowment fund and mortgage debt is calculated.

I understand that Allied Dunbar has upheld a misselling complaint against an IFA, despite overwhelming evidence that the risks inherent in the policy were made clear at the time of sale.

The client alleged that he understood his Maximum Investment Plan (MIP) to be a savings product, and was unaware of the possibility of any shortfall. He claimed that he was not told that the policy was linked to the stock market.

However, the personal illustration issued at the outset, warned that an annual growth rate of 5% would cause the policy to fall short of its required maturity value by £5K.

Despite this, the life office upheld the complaint and refunded the investor’s contributions.

Zurich, which owns Allied Dunbar, noted that that the complaint was upheld on a technicality.

Allied Dunbar was fined £725K by the FSA for not dealing with misselling claims quickly enough.

This decision should, in my view, have repercussions for those of us seeking compensation for endowment mis-selling.