Reason for Endowment shortfalls

None of the above. Endowment shortfall predictions are largely the result of government rules on performance prediction. Fund managers are being forced to use a specific set of performance prediction rates, which may or may not bear any relation to the performance which is actually most likely.

No, I doubt it. But years ago people weren't actually told about the charges unless they asked - which they probably didn't. Nowadays they are told.

Yes, they will have done. But the forecasts years ago used standard growth rates and standard charges (Lautro requirement). Then later they had to use standard growth rates and companies' charges. But as the growth rates were a standard assumption and this assumed rate of return may not have happened due to stockmarket performance.

Probably true.

Most people don't take action when they should, even when told. Look at the forecasts for the number of people who'll retire without any reasonable pension. Look at the number of people who are paying over the odds for their mortgages and don't do anything about it.

Maybe

and the same goes for the forecasts that

No. Poor fund performance is no ground for compensation. But if you didn't realise fund performance was an issue when you took out the policy then there may be. And as I said, the forecast has, by law, to be based on standard regulator-dictated assumed growth rates. So however well or badly a company's funds have historically performed this factor cannot be used in the illustration - but its charges can, and must.

However, the growth in the stock market over last 20

Yes, you would have thought so. But your statement later on in this post indicates that you only started your endowment in 1999. Also, not all fund managers keep up with the stockmarket. And, anyway, were your funds stockmarket funds? They may not have been. Do you know in what areas you have been investing?

Yes, but withprofits policies tend to even this problem out whereas unit linked ones don't.

The charging itself is not regulated. Its the manner in which it's displayed that is. And there weren't any significant changes between then and now apart from a lowering of the growth rate assumptions. This factor itself has led to calculated shortfalls. But is hasn't changed the actual likelihood of a shortfall one bit.

We know our invetsment is extremely short at the moment,

Did you know you were in the stockmarket when you took out the policy? If yes, then you presumably realised that values rise and fall and that things may return to 'normal' eventually.

Are you prepared for the risk inherent in the investment vehicle? If not, the repayment option is favourite.

Rob Graha

So you are saying it is all the governments fault? Why would it be in the governments interest to provide inaccurate growth predictions? I can see how much more likely it is that endowment sellers would want to exaggerate the growth rates, and it would seem more likely that the government intervenes to make them more realistic. I am not saying you are wrong - just incredulous that this could be the reason.

Isn't everything always? :-)

It recognises that accurate predictions are impossible, and if sellers exaggerate their predictions, and they don't come true, they can always say sorry they were wrong, but blame it on their crystal ball having had a bad day.

By forcing every seller to use the same rates, the problem of exaggerated predictions is eliminated, and the only criteria on which sellers can compete are charges, reputation, and past performance. Of course they're also forced to say that past performance is not a reliable indicator of future performance.

The specific rates they are told to use are revised from time to time, but are probably not too unrealistic given recent trends. Of course what matters more is future trends, but it is in the government's interest to scare people into investing more to ensure their mortgages are on target, so that these people won't then become a sizeable burden on the state's welfare engines.

That's one interpretation. However, the other interpretation is that (some of) these companies took advantage of a light regulatory environment to sell policies that (because of charging structures, lower inflation and so forth) had unrealistic growth forecasts attached. This was compounded further by some buyers being promised a surplas at the end of the term or given the impression that the risk of a shortfall was negligible or sold unsuitable policies for other reasons (e.g., endowments as short-term investments). The same companies also actively lobbied against increased regulation (and still do in many cases).

Thom

In my case, Legal & General have systematically cut back bonuses whilst increasing the amounts paid to shareholders.

It's there in black and white.

"Tim Richards" wrote

Don't they have the usual "90/10 gate"?? (ie 90% of distribution goes on bonuses, 10% to shareholders)

Unless they've eg moved from a 90/10 gate (pretty standard), to say a 80/20 gate (unusual), it looks difficult to reduce bonus but increase shareholder's transfers at the same time...

Rob Graham wrote: [snip]

Remind me: were they permitted to say that the projections were over-optimistic if they thought so ?

Is there an on-line source for this LAUTRO requirement ?

The actual illustration could not say this, although there was nothing to prevent the salesman/advisor telling you this if he thought it. In fact, one with your interests at heart would have done if he felt it was way out.

I don't know anywhere where the old Lautro rules are published. Google may. But the current rules are in the FSA handbook at

Rob

Thanks for everyones help by the way.

By Bonuses, do you mean the profits that go into the funds? You are talking about the split between shareholder profits and fund profits?

You mention shortfall predictions - but do you know what the figures are for actual shortfalls? I thought that the scandal had really grown after thousands of people found themselves retiring with large debts that should have been cleared by their endowments. Perhaps its only a few - does anyone know if there are any online stats about this?

"jamiefoggon" wrote

To put it simply, with a traditional "With Profit" policy, the fund in the life office grows with investment return (etc). Part of this growth is paid out to policyholders by adding "bonuses" to their policy (often annual bonuses, plus a final "terminal bonus" at the end).

The rules usually allow 10% of whatever is distributed to be passed to shareholder's, and 90% to be used to pay for the policyholder's bonuses. If the office decides to declare lower bonuses for policyholders, then the shareholders also get less (they would always get one-nineth of value of bonuses, with a classic 90/10 "gate").

nothing to

One "with your interests at heart would have done" if he felt it was wrong at all. Anyone claiming to be an advisor cannot be one if s/he does not have "your interests at heart".

Hiding behind the LAUTRO rules is just another sign of bad faith, or at least faiure to take the advice requirement seriously. The sales mentality is slow to die.

I don't think there are significant shortfalls yet, people who took out endowments 25 years ago have still done reasonably well. It's more of an issue for people who have maybe 10 years still to go. Even there it's being rather exaggerated, e.g. I recently saw something on the BBC web site saying that people face repossession if they have a shortfall, which is ludicrously alarmist. Likely shortfalls might be, say, £10k, and in the worst case you would just carry on paying interest on that, which isn't going to be much at anything like current interest rates (probably less than £50 a month).

Also something which gets missed out of the discussion is that part of the reason for the shortfall is lower inflation. That has also lead to lower interest rates. If people had been saving the interest as rates fell they would probably still have a surplus; the trouble is that most people have probably treated it as a windfall and spent it.

Probably more like four times that, considering that the debt still needs to be paid off, and most likely over a rather short term, like perhaps 5 years or so. This being conciseness month, the arithmetic is left as an exercise for the reader. :-)

There's no particular reason why the debt *needs* to be paid off, although people may prefer to do it. You could perfectly well just keep paying the interest until you die, and the residual sum would come out of the estate when the house is sold. In any case an amount like £10k is likely to be covered by a pension lump sum. (And if people don't have a pension or other savings beyond a house they are probably in trouble anyway ...)

Yes, but as that would result in using the lower of the three standard growth rates, then this would have the effect of pushing the premium up which in turn would generate more commission so LAUTRO frowned on this!!!!!! (Amazing but true!!!)

I assume you have googled/yahood etc.,. so if you cant find anything then possibly not. LAUTRO packed in before this new fangled computer web thingy was thought of.

In message , Ronald Raygun writes

Why?

Why?

All the usual reasons. Old fashioned attitudes, they don't want to die owing anything, or to disappoint their heirs. Alternatively, being a little more pragmatic, because the lender will come and sell the house from under them when they can no longer afford to pay the interest when they retire and have only their basic state pension.

Incidentally, is it not the case that when you borrow, you usually oblige yourself contractually to repay the principal by a certain date? Granted, lenders are often happy to negotiate extensions if the interest keeps pouring in, but in theory, are they not entitled to pull the plug at the date of the originally agreed term end?

That's when they retire.