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Endowments warning could be erroneous
Tue Aug 23, 2005 1:31 PM BST
Reuters.co.uk
By Lorna Bourke, Money Columnist
Citywire - Homebuyers with endowment mortgages could be misled into
thinking that their policy will not provide enough to pay off the home
loan, when in fact it may well meet its target.
According to Independent Financial Adviser, Alan Lakey, of Highclere
Financial Services, not all endowments linked to a mortgage, where red
or amber warning letters have been issued, will suffer a shortfall. In a
report in Money Management magazine, he warns that some are being sent
out where no real risk exists.
"What began as an exercise designed to advise policyholders of the
probable maturity value of their plans, and the possible need to take
remedial action, has since turned into a major bloodletting," says Lakey.
In a damning report of the endowment industry Lakey makes several
important points. He says that the typical reprojection letter appears
to show the with profit endowment as off track and unlikely to hit the
relevant target. But, he points out, not all red or amber warning
letters are issued on the same basis.
Lakey believes that his analysis of the products and the rules
surrounding communication of future projections highlight significant
confusion. The result is policyholders are potentially being misled and
a whole industry of compensation advisers has emerged.
Others have made a similar point too and the fact that there is still a
healthy and burgeoning market in second-hand endowment policies would
indicate that there are considerable differences in opinion about the
potential future values of these investments.
"The traded endowment policy market has been seeing renewed demand from
Germany since the beginning of 2005, with institutional investors keen
to embrace the benefits that the policies bring," confirms Brian
Goldstein, chairman of the Association of Policy Market Makers.
"The minimum guarantee and the knowledge that the bonuses accrued to
date cannot be taken away are key factors for German investors."
Lakey points out that different companies calculate their policy
projections on different bases and growth rates, which they are entitled
to do. Calculations in the red, amber or green letters are issued on
these different growth rates. For example, someone holding low cost
endowments with both Prudential and Eagle Star, where anticipated growth
for both is 5.5 percent, would get a green letter from Prudential but a
red letter from Eagle Star.
Some companies are issuing warning letters based on surrender values and
not maturity values, automatically giving the policyholder a more
pessimistic view of whether their policy is likely to cover their
mortgage.
Lakey maintains that the FSA's consumer website gives advice to
consumers based on a false premise. It explains that falling projection
rates are because funds are invested mainly in shares.
"This is clearly not the case," he says. "In the April issue of Money
Management the 2005 endowment update showed average equity content in
with profits life funds at 41% and some funds held no equities at all.
Indeed, the forced selling of equities between 2000 and 2002 cost
insurers and their policyholders billions," says Lakey.
Lakey admits that this is a very complex area, where any meaningful
projection is difficult. He does, however, believe that many thousands
of policyholders are being misinformed as to the nature of any potential
shortfall in their policy.
"The with profits concept seems to be mortally wounded. Are insurers
losing interest in them now that they are no longer being sold in
volume? In the 1980s and 1990s, they were eager to project forward using
the maximum allowed growth assumptions to many policyholders'
disadvantage. They now appear diffident and apologetic, choosing to use
lower rates than required, again to policyholders' disadvantage," Lakey
says.
Meanwhile the Association of Policy Market Makers is urging anyone who
is thinking about surrendering their endowment policy to look at selling
it instead. "Currently, policyholders who sell their endowment rather
than surrender it will get on average 10 percent to 15 percent more,"
Brian Goldstein points out.
"As demand from Germany increases, so does the amount of money that
market makers will pay for the policies. In some instances,
policyholders could see as much as 30% more", he says.
Policyholders have several options which include borrowing against the
policy, making the policy 'paid-up', (which means no longer continuing
to pay premiums but leaving the money invested until maturity), taking a
premium holiday (where the policy allows them to do this), or selling it
to a third party.
"In most cases, a professional adviser will be able to help the
policyholder choose the appropriate course of action and advise whether
it is most sensible to retain it or cash it in," Goldstein advises.
If Lakey is correct, some policyholders should simply carry on with the
policy - though that doesn't stop them from claiming miss-selling if they
have been sent warning letters.
-- Citywire 2005
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