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treasury select committee endowments
report
Endowments were the subject of a Treasury
Select Committee Report in March 2004. Among other issues, this reviewed
the endowments complaint process, including
Other subjects include:
Size of the endowments market
Data presented to us by Cazalet Consulting suggests that over 1.7
million endowment mortgages were sold in 1988 and that sales of endowment
policies consistently topped one million a year between 1986 and 1991.
Since the early 1990s, however, endowment mortgages have taken a steadily
falling share of the overall market, with a particularly abrupt decline
over the past four or five years. The latest figures we have available
suggest that endowments accounted for just 5% of the new mortgages taken
out in 2002.
They suggest that 83% of mortgages sold in 1988 were endowments. But
it seems the scandal continues. The committee comments that endowments
accounted for just 5% of the new mortgages taken out in 2002. This
5% seems extraordinarily high - are we really satisfied that endowments
were the best choice for 5% of new mortgages in 2002? That seems a lot
of mortgages for what by then was a very specialist product, and it seems
the endowments scandal was continuing at a lower level. The committee
shows no sign of alarm at this.
Level of endowment shortfalls
The best available evidence suggests that mortgage
endowment policies are currently showing a collective shortfall of around
£40 billion.
Looking just at policies still being relied upon to repay a mortgage,
the collective
shortfall is at least £30 billion. Around 80% of policies are currently
unlikely to
generate enough funds to pay off the mortgage they were originally sold
to meet and
the average shortfall is currently around £5,500. The balance of
probabilities is that
both the percentage of policies showing a shortfall and the average size
of the
shortfall per policy will worsen over the coming years. Without remedial
action
endowment policies maturing but failing to meet their targets are likely
to be an
increasingly common problem until 2013, 25 years after the peak in endowment
policy sales in 1988.
Aligning the interests of savers and product providers
From the consumer’s perspective, it is perverse that most companies
are still charging their full fees on endowment policies when 80% of policies
will fail to meet the product’s original objective of paying off
the mortgage. A structure in which the fees charged by product providers
were tied to the product meeting set investment targets would serve the
consumer better, and we recommend that the FSA together with the industry
investigate this issue, with a view to developing proposals for reform.
An FT writer decries this as going over ground already covered by a House
of Lords Committee. However, we think this was well worth repeating, as
it is another step in helping to build a sensible political consensus,
which will become that much harder for vested interests to resist.
Closed funds
The switch in asset allocation can have a significant impact on likely
returns. The Committee, for example, has been told that on standard actuarial
assumptions someone with a £50,000 with-profits pension policy and
10 years to retirement is likely to find their fund reduced by £6000
on retirement if their insurer closes to new business. A similar reduction
in returns is likely to apply to endowment policy holders in closed funds....
Royal & Sun Alliance told us that it had considered it prudent
to reduce its projected returns to endowment policyholders to “reflect
the lower proportion of equities held in the investment portfolio.”
For its traditional with-profits funds it now used reprojection rates
of 4%, 4.75% and 5.5% and this had “inevitably placed more policies
in the red category.” 81% of Royal & Sun Alliance endowment policyholders
are currently receiving red reprojection letters, the highest figure among
the major insurers we asked for data.
While Royal & Sun Alliance told us that they had written to their
clients on the closure of the fund and explained the implications, policyholders
were given no particular opportunity to leave the fund and if they chose
to do so normal exit penalties would apply.
We have asked several experts and the FSA if they can think of any
other industry that sells its customers one product, such as an equity
based with-profits endowment policy, and then unilaterally switches the
customer into another product, such as a bond-oriented closed fund. No
one has yet been able to name another industry which treats its customers
in an equivalent fashion.
The treatment of policyholders in closed funds is unfair.
The insurance industry seems to be unique in preserving to itself
the right to sell a customer one product and then substitute it with another
product which is inferior in key respects. The FSA should examine the
case for a regulatory requirement that solvent companies closing the with-profits
elements of their operations to new business should, on request, transfer
their customers without penalty to another supplier offering a product
broadly similar to the one the customer originally bought.
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