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Endowmnet Scandal (longish)

We have an endowment mortgage with Norwich Union taken out in 1986, which we are informed is likely to have a considerable shortfall. At the moment there is much discussion of mis-selling of endowments, and undoubtedly this must have occurred in some cases. But to my mind mis-selling is a bit of a red herring, as I think the real scandal lies in the subsequent behaviour of the endowment companies. Their ethos appears to have changed in the 90's to one of "since we never technically guaranteed to cover morgages in full, why on earth should we do so? When we took out our mortgage, endowments were generally considered a good investment - my parents had one. At the back of our minds, we all knew investments can go down as well as up. When querying this with our salesman, he said something along the lines "at worst you'd get no bonus after your mortgage is paid off."

As far as the line that was being pedalled by the endowment companies at the time went, one has to look no further than the fact that millions of people did take out endowments to cover the largest and most important financial commitment of their life. How many would have done that if there was any warning from the sellers or providers that they might end up thousands of pounds short, given that the repayment mortgage alternative was readily available? Very few, I would imagine.

What should really be under investigation is the subsequent behaviour of the endowment companies. Once a few companies had established the precedent that they could get away with not fully covering mortgages, is it not plausible that the other companies followed suit? My guess is that we will receive progressively worse news in future years as the companies spend more and more of 'our' money on takeovers, dividends, directors' bonuses or put it out of reach through creative accounting.

My solution to this scandal is to place endowment companies under emergency regulations that compel them to give priority to making good the endowment shortfalls over indulging in new ventures. Now would be the time to draw up an agreement covering the people affected by the current situation. In the agreement the endowment companies should undertake to pay off mortgage lump sums in full, in return for which they could be exempted from having to pay any final surpluses if their investments take a turn for the better over the next few years.

Instead of tracking down independent salesmen who sold endowments in the 80' s on the basis of what was commonly believed at the time, I think the investigation should be looking for stories from people who worked in the endowment industry about what was really going on and whether the shortfall situation has been, in part, deliberately engineered.

The insurance industry in the early 90's held conferences about how to maximise claim denials. In such a culture, a deliberate policy of 'endowment minimisation' is not inconcievable. If this was the case, there must be people out there who are prepared to talk!

Cheers, RB

Reply to
Prof Rollerball
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Unfortunately, the above illustrates the mis-understanding in respect of

*most* endowment policies which were intended to repay mortgages in the 1980s (and 1970s). These endowments were "low-cost" endowments - *not* like the endowments your parents had. It is likely that they were "full" endowments (either With or Without Profits). These did *guarantee* to pay off the loan at maturity. The low cost ones would only do so, if the selected investment return was achieved - most were set too high (to keep the premiums low for comparative purposes). I imagine that it was this aspect that was not adequately explained. However, I can remember one couple at the time who did not believe this and went for the insurance company with the lowest quoted premium.

The chickens are now coming home to roost.

Reply to
Doug Ramage

Indeed, and that's why they are often considered to have been mis-sold.

I don't think you understand how it works. Mortgage endowments are normally invested in a with-profits fund, which is basically a big fund investing in shares, bonds and property, and also partaking in the general profits of the insurance company (with mutual insurers it effectively owns the company). In itself an endowment has nothing to do with mortgages, it's just an investment. What happens is that people are advised to put money into the fund at a rate which is estimated to give you enough at the end to pay off the mortgage. Obviously that estimate depends on what you assume about investment returns. Actual returns over the last 15 years or so have been a lot lower than what was plugged into the equations; it isn't a question of insurance companies *choosing* to reduce the payouts, indeed part of the problem is that bonuses weren't cut early enough, so people whose endowments matured in the mid-90s were effectively subsidised by people who were still investing.

On the other hand, interest rates have also been a lot lower than expected. If people have kept up the same *total* rate of payments, either by making extra payments into the mortgage or by saving more, they might well not end up with a shortfall.

The FTSE 100 index is currently at around 4400, a level it first reached nearly a decade ago. If you allow for inflation it's no higher than it was at the market peak in 1987 (2500 plus about 80% inflation). The shortfalls are basically a reflection of the fact that that return is a lot less than what people were projecting in the late 80s.

Reply to
Stephen Burke

An excellent point, Stephen.

But then where does the money come from for the subscription to Sky, for the PCP to drive around in (depreciating) Metal Mickey, for the 2nd skiing holiday in Gstaad? :)

Reply to
Doug Ramage

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