Norwich Union Cuts Payouts

Norwich Union Cuts Payouts

This has not been a good week, PR wise, for Norwich Union; and a very bad week for those who hold endowment policies with Norwich Union. Earlier it was reported that Norwich Union was using part of its inherited estate to pay off compensation claims, now it has announced that it is cutting back on payouts.

Norwich Union has 900,000 endowment policy holders, and has announced that despite 4 years of rising stock markets 90% are still in the red zone.

Last year the red zone was 89%.

Norwich Union has now announced a 2% cut in its payout on a typical policy.

The company has 69,000 mortgage endowments that will mature this year, half are expected to fall short by over £1K.

The rather strange thing about the cut in payouts is that the fund in which the policies are invested grew by 5.4%.

Why the cut then?

Will the senior management of Norwich be taking a cut in their bonuses too?

Will Norwich be cutting their management charges, given that the fund is not producing the payouts that holders were led to believe it would?

Calls For £100K Limit To Be Scrapped

Calls For £100K Limit To Be Scrapped

IFAOnline reports that the Financial Ombudsman Service (FOS) has been told by the All Party Parliamentary Group on Insurance and Financial Services (APPGIFS) to scrap or substantially raise its £100K compensation limit.

APPGIFS says the existing limits on awards, that were established over 25 years ago, have not increased in line with financial transactions carried out by retail and small business customers.

The FOS has been heavily involved in the endowment policy scandal.

Norwich Union's Sleight of Hand

Norwich Union's Sleight of Hand

It seems that Norwich Union is planning an interesting use of £150M of its inherited estate (orphan funds), which in theory are meant to be for the benefit of its policy holders.

Norwich plans to use £150M of £5BN surplus assets to pay for claims made against the company.

Currently Norwich Union is in the process of re attributing the funds to with-profits policyholders and shareholders, which is perfectly reasonable. However, Which? has warned that £150M has been designated to pay for past mis-selling.

It should be noted that the Financial Services Authority (FSA) does allow money in with-profits funds to be used in a number of ways, including settling compensations claims. It is considering a change in its regulations.

However, it seems to be rather "sharp practice" to use policy holders' money to pay for mis-selling perpetrated by the company that claims to be acting in the interest of the policy holders.

Which? is of the same opinion, and has quite rightly threatened to take the matter to court.

Norwich Union is negotiating the re attribution of the £5BN surplus, and also wants to use some of the money to finance business expansion; which also seems to me to be taking a liberty with policy holders' funds.

Dominic Lindley, financial policy adviser to Which?, is also claiming that billions of pounds of with-profits money has already been used by insurance companies to pay for the mis-selling of endowments and pensions.

What are the FSA doing about this?

Why do they sit on their hands and allow companies, such as Norwich Union, to get away with this?

The Reckoning

The Reckoning

As Neasa MacErlean writes in The Observer:

"One of the biggest financial scandals of the past 30 years reaches its climax in 2008 when thousands of endowment policies linked to mortgages start to mature. Endowment mortgages were sold in massive numbers from April 1983 and - since most home loans were set for 25 years - will start coming up for repayment by borrowers from April 2008."

Norwich Union describes 2008 as a peak year in terms of the numbers of endowments it has maturing, estimated to be about 90,000.

She offers some advice to those hapless endowment holders facing shortfalls, estimated to be on average between £10K to £35K, on their policies.

However, the only effective solution to this shameful scandal is for the life assurance companies to underwrite these useless underperforming products.

Underwater

Underwater

Scotland on Sunday reports that two of the UK's largest endowment companies, Standard Life and Norwich, now have a staggering 1.4 million endowment policies underwater.

Guardian, which sold endowments for Nationwide, refused to take part in the survey. A spokeswoman for the company claimed that the omission was due to "an administrative oversight".

The report goes on to state that 90% of Norwich Union's 764,609 policyholders are now receiving red letters, while at Standard Life the proportion is 88%. At Friends Provident, 89% are in the red.

It's going to be a bleak Christmas for endowment policy holders.

Bleak News

Bleak News

Money Management's upcoming December issue survey shows a bleak outlook for those who hold endowment policies.

On average, a 25 year policy 10 years into its term needs to grow 6.9% per annum until the end of its term in order to meet its £50K sum assured.

The average 25 year policy 15 years into its term needs to grow 8.6%, while policies 20 years into their term need to grow an average of 8.2%.

Given the lousy levels of returns on most endowment policies, these required returns are very unlikely to be achieved and endowment holders can expect serious shortfalls when their policies mature.

Congratulations to the fund managers for doing such an "excellent" job of "managing" these policies, yet still being able to pay themselves a very nice management fee each year despite "managing" loss making policies.

L&G Increase Their Charges

L&G Increase Their Charges

Recently Legal and General, my endowment provider, wrote to me to inform me that my two endowment policies that I hold with them will most likely make a loss.

Using three projected returns, the 1987 policy (target £35000) will produce the following results:

-4% shortfall £5400
-6% shortfall £2700
-8% surplus £ 300

The 1991 policy (target £39700) will produce the following shortfalls:

-4% shortfall £10200
-6% shortfall £ 7500
-8% surplus £ 4600

I received another letter from them today, informing me of the following:

1 That they have changed the rules to give them the right to use fund managers other than Legal & General Investment Management Ltd, if they believe that it is necessary.

Don't they have confidence in their own management skills?

2 They are increasing the management fees for managing my policies. Seemingly they have compared their fees to other endowment providers, and feel that an increase is necessary!

The good news is that the new fees (after a search on the back of their letter, it seems that the fees are going up by 0.06% of the value of the investment per year) are, in the opinion of L&G, "highly competitive with typical market rates".

So that's alright then!

A couple of questions that have crossed my mind:

1 Why the hell are they raising the fees, when their "management" of my policies has produced losses?

2 Why are they charging more for their "management" services, when they have said that they may in fact use other fund managers?

Given the losses that my funds are projected to "yield", an increase in charges will simply make matters worse.

These endowment providers are very relaxed about changing the rules, when it suits them. Now is the time for them to change the rules to suit the hapless millions who own these useless, badly managed, costly and underperforming products.

Underwrite them!

Repayments

Repayments

There appears to be something of a sting in the tail for some long suffering endowment holders who make a successful mis-selling claim through the Financial Ombudsman Service (FOS), and then find that in fact their endowment policy recovers to leave no shortfall.

In the event that happens, the policy holder may have to repay money to their adviser.

A county court in Wales has ordered the claimant to pay back the sum of £1689, if their endowment manages to hit its original target of £13,000 in May 2010.

In September the FOS ordered retired independent financial adviser Eifion Hughes to pay the compensation to his client. However, Hughes refused to pay stating that the ombudsman had come to the wrong decision.

In an unpleasant irony, Hughes was then taken to court by the client who was being advised by an IFA acting as a claim-chaser.

The judge has upheld the complaint, but stipulated that the money would have to be paid back to the adviser on the policy's maturity if it reached above its expected value.

Hughes is quoted in The Herald as saying:

"At last this appears to be a victory for common sense. If the client loses out and it is the adviser's fault, he should pay out, but if there is no loss and perhaps even an extra gain, why should the adviser have to offer them money? Natural justice has won the day."

Evan Owen, chairman of the IFA Defence Union, said:

"It is refreshing to see the people who administer the law of the land reaching such conclusions. Let us hope that Lord Hunt takes this view on board as part of his review."

Quite right too!

As to whether many endowment polices will actually meet their targets, is open to conjecture. I can personally state that the two polices I hold with legal & General look very unlikely to get anywhere near their target.

It is also reported that almost 90% of Standard Life mortgage endowments are still highly unlikely to meet their targets.

However, I would also note that to some extent the IFA's (unless they were proven to be negligent) should not be the target of policy holders' wrath.

These lousy products were sold in the same manner as cars, TV's and other consumer products. Their sole purpose being to pay off the mortgage.

As a result of hidden/excess charges, lousy management and misrepresentation of the prospects by the funds themselves, they are massively underperfomring.

They are not fit for purpose.

It should not be the IFA's that are targeted, but the fund managers. The only solution to this shameful scandal is for the fund mangers to underwrite their useless, badly managed, products.

Useless

Useless

Much like the depressing inevitability of the return of an unloved season I received two red warning letters from my endowment provider, Legal & General (L&G), the other day. I am the "proud" owner of two endowment policies taken out with Legal & General, one in 1987 and the other in 1991.

Needless to say, neither are on target to reach their objective (ie to pay off my mortgage).

Legal & General claim, using three projected returns, that the 1987 policy (target £35000) will produce the following results:

-4% shortfall £5400
-6% shortfall £2700
-8% surplus £ 300

The 1991 policy (target £39700) will produce the following shortfalls:

-4% shortfall £10200
-6% shortfall £ 7500
-8% surplus £ 4600

Hardly a "stellar" performance is it?

The question remains though, how is it that some endowment companies have been able to manage their funds sufficiently well so as not to produce a shortfall whilst Legal & General haven't?

The Curate's Egg

The Curate's Egg

The Telegraph reports that around 260,000 extra mortgage endowment holders have seen their policies meet their targets in the past year.

It seems that buoyant stock market has helped some policies recover their lost ground over the past few years. However, as to whether a particular policy that had previously been deemed to fail to meet target will now hit target very much depends on a number of variables; not least the quality of the company that is managing the endowment policy.

The Telegraph notes that, eg:

"Prudential's fund has been strong. The proportion of its policies that are red has significantly reduced over that period too. In 2003, 44 per cent of its policies were flagged up as red, now the figure is 15 per cent of the remaining 201,000 policies.

To date none of the Prudential's policies has failed to pay out the full target amount."

Those with Scottish Amicable have also seen an improvement. In 2003, Scottish Amicable had 65% of its policies listed as red, this figure now stands at 10%.

However, those who hold Legal and General policies have not been so fortunate. In 2004 over 55% of its policies were expected to fail to meet their repayment value. The figure now stands at 40%.

Standard Life is even worse, as it has seen its red policies rise from 86% to 88%.

As can be seen from the above, the performance is very much dependent on the "quality" of the fund managers.