Endowments Still Failing

Despite the last four years seeing a rising stock market, millions of endowment policies are still unlikely to be worth enough to pay off the mortgages they were meant to cover.

 There have been soaring share values around the world, and record growth in commercial property, but for six million mortgage endowment policy holders in Britain it will still not be enough.

The Association of British Insurers has produced figures that reveal that to the end of 2006, two thirds of endowment policies in force were still in the red band – that is, they will not deliver the target sum upon maturity. Those achieving a green rating were only 18%, and should deliver the target amount. The figures are only marginally better than at 2004, when 71% were red and 14% were green. Amber policies make up the rest – these are at risk of not paying the intended maturity value. The booming stock and property markets do not seem to have had much of a positive effect on these policies.

Deeper investigation shows that the overall trend disguises huge differences between insurers. Where there are some companies forecasting that nearly all their endowment policies will hit the targets, others have only a meagre number that are expected to deliver the goods.

Sadly it is some of the bigger companies, who between them number two million endowments, who are failing. Norwich Union, Standard Life and Friends Provident are those with the highest number of prospective shortfalls.

One couple in Fareham, Hants have two endowments they hoped would pay off their £41,300 mortgage. A Legal & General policy started in 1983 is due to mature next year and is expected to beat its target of £22,800 by around £2,000. The other policy was taken out with Royal Insurance in 1988. It is now run by Phoenix, part of Resolution. Due to mature in 2013, the latest projection in spring suggested it would fall short of its £18,500 target by somewhere between £5,000 and £7,000. They will have to re-invest the £2,000 from Legal & General to help pay the shortfall of the Phoenix policy.

The Phoenix policy’s recent performance has been poor, giving returns almost less than investment. How can that be the case with such good growth in the markets in recent years?

Most endowment policies are invested in “with-profits” funds. These spread the money from savers across a number of assets that include shares, bonds and commercial property. In the past five years shares have managed average returns of 10%, and commercial property has average returns of over 15% in the same period. Bonds only grew by an average of 4.6% per annum, and the in past twelve months have actually gone down in value. The problem was that many insurers got cold feet in the share and property market in 2002 and 2003, and transferred large parts of their funds to bonds. Thus, the funds have failed to take advantage of the rising stock market and commercial property prices.

Small companies Wesleyan and Liverpool Victoria have no policies in the red, and Legal & General now has half of its policies in green, up from 20% in 2002. Conversely Standard Life has 88% policies in red, up from 68% in 2002.

It seems that most endowment investors have missed out as equity markets have soared.

Tom Smith
18th July 2007

Tags: red, short, Mortgages, shortfall, shares