The Endowment Diary

The Endowment Diary


The Endowment Mis-selling Debacle - one of the UK's worst financial scandals

Monday, March 24, 2008

Fingers in The Pie

Fingers in The Pie

The trouble with some of the life assurance companies that are "managing" this country's useless and underperforming endowment policies, is that they can't seem to distinguish between assets that belong to their hapless and much put upon policy holders and the company's assets.

Normally, this "confusion" over ownership is demonstrated by the excessive and unjustified management charges levied by life assurers against the minuscule returns of the endowment policies that they fail to manage.

However, Norwich Union have found another way to tap the assets of their hapless endowment policy holders. The Times reports that Norwich Union has helped itself to £300M of policyholders' funds, in order to plug a hole in its own pension fund and to pay for its own mis-selling costs.

Some would argue that it is pretty rich of Norwich Union to help themselves in this manner, in fact most people with any concept of ownership and property would argue this. However, Norwich Union is unabashed; safe in the knowledge that it can do this, because it can do this.

If only life were that simple and profitable for its policy holders!

Needless to say this raid on the policyholders' funds will mean lower payouts for 1.1 million policyholders.

Norwich Union has helped itself to £83M of its surplus assets to cover a deficit in its staff pension scheme, with £182M being set aside to pay for endowment and pension mis-selling.

To run that by you again, it is making its policy holders pay for its pension failings and for its mistakes wrt selling endowment policies.

Happy with that?

Vince Cable, the Liberal Democrats’ Treasury spokesman, is quoted in The Times:

"The Financial Services Authority perpetuates rules which give preference to shareholders over policyholders and allow such appalling abuses as penalties for pensions mis-selling to be taken from policyholders' inherited estates. Companies like Norwich Union and Prudential are managing, under the cloak of complexity, to deprive their policyholders of large sums."

Norwich Union is currently involved in "testy" and "bad tempered" negotiations as to how it will split up £5BN of orphan assets (inherited estate). Needless to say, Norwich Union wants to take as much of that money for themselves as they can, they believe that their shareholders outrank their policyholders.

The fact that these orphan assets arise as a direct results of the policyholders' contributions, and not from anything that the shareholders have done, is irrelevant to Norwich Union.

Why are they treating their policyholders with such contempt?

Simple, because they can!

They know that their policyholders lack the legal and vocal clout of their shareholders.

It is high time that the policyholders gave companies such as Norwich Union a very bloody nose, a class action should be initiated by the policyholders of Norwich Union and the life assurance companies given a lesson not to treat their policyholders with such contempt.

Wednesday, March 19, 2008

Named and Shamed

Named and Shamed

As we all know, endowment policies have proven to be the worst, most costly financial scandal perpetrated on millions of home owners in living memory.

Money Management have produced a list of the worst performers.

Endowments managed by Resolution and Pearl, which bought up several closed-life funds, dominates the list.

Money Management shows that their endowment policyholders have earned less than in a deposit account over 25 years.

Resolution owns Life Association of Scotland, this was the worst performing endowment in the survey. It gave a 3.9% return over 25 years..yes you did read that correctly...3.9% over 25 years.

What exactly have they been doing with people's money?

Crusader and Britannia, also owned by Resolution, were the third and fourth-worst performers at 4.3% and 4.9% respectively.

National Provident was second with a return of 4.2%.

Clive Cowdery, Resolution's founder, has made millions from his dealing with these funds. However, his policyholders haven't.

Ironically some of Resolution's funds have done very well. Phoenix Assurance, owned by Resolution since September 2004, has paid out £317,800 on typical 25-year maturing endowment policies, reflecting an annual growth rate of 20%, or 1,168% more than the Life Association of Scotland policy.

Phoenix has paid out so much because it has been winding down its estate, and distributing the proceeds to 1,500 policyholders.

Resolution owned National Employers Life, with an annual growth rate of 11%, and Swiss Life, at 9.4%, also topped Money Management's list of 25-year policies.

Money Management reveals that some 10 year endowments have in fact lost money over 10 years, even though the FTSE All Share is up 43.3% during the last 10 years.

The worst 10-year policy, Pearl-owned London Life, fell by 1.6% a year while Resolution's Sun Alliance & London Assurance dropped 1.2%, Royal Life fell 0.6% and Scottish Mutual declined 0.4%.

The holders of these useless products are going to receive a nasty shock when these shortfalls crystallise.

Thursday, March 13, 2008

The Endowment Rip Off

The Endowment Rip Off

Underlying funds held by insurance companies have risen by an average of 6% over the last year. This in theory should be good news for the millions of people holding useless, underperforming with-profits endowment policies.

Unfortunately, as with all endowment policy matters, what at first appears to be an opportunity for the hapless policy holder to earn a respectable return turns out to be an opportunity for the life insurance companies to take "a dip".

The biggest and the "best" of Britain's life insurers have in fact reduced their payouts by 3% last year (remember the funds they "manage" on our behalf have actually risen by 6%).

This cut in payouts has cost the endowment policy holders around £8BN, according to The Times.

The Times quote Tom McPhail, at Hargreaves Lansdown:

"Stock markets have risen substantially since the end of the bear market in 2003, but final payouts keep on falling.

It just doesn't add up

That's putting it politely!

We would be better off having "invested" our money in a "bog standard" savings account over the last 10 years.
  • A 10 year endowment policy from Friends Provident has returned a mind numbingly small 0.9% a year, compared with 1.6% from a 90 day deposit account.

  • Prudential's fund grew by 7.2% last year. However, a typical maturing £50-a-month, 25 year Prudential endowment policy will now pay out £44,515. This represents a 5% cut on the £46,695 paid out on an equivalent plan that matured in 2007.

  • A typical 25 year Commercial Union endowment policy will pay out £40,737. This is 7% down on the £43,697 paid out on an equivalent plan last year.
Why is that the insurers are able to take "a dip", and not pass on the increased returns to their policy holders?


Because they can!

Insurers have discretion over how much of the gain they pass on, therefore they choose to keep the money for themselves.

A report for the trade body Actuarial Profession expects payouts to continue to fall by 3% per annum until 2020.

We are being ripped off by the insurance companies, and no one in the regulatory authorities is doing anything about it.

Tuesday, March 11, 2008

Scottish Widows

Scottish Widows

Lats year holders of endowment policies with Scottish Widows were bitterly disappointed to be told that they would not be receiving any bonus on their policies, in spite of the fact that the underlying with-profits fund grew by 10%.

However, this year Scottish Widows, despite only showing a return of 5%, has added bonuses to 239,000 polices.

Needless to say, what is given with one hand is taken with the other, the final payout to mortgage endowment customers has fallen compared to 2007.

A typical 25 year, £50 a month mortgage endowment policy maturing in January paid out £38,136 this year, last year it paid out £38,758.

A mind numbing 88% of Scottish Widows endowment policy holders will not receive payouts large enough to cover the mortgages that their policies were designed to cover.

The blindingly obvious question therefore arises, what is the point of these policies if they do not do what they were designed and sold to do?

Monday, March 10, 2008

Dwindling Returns

Dwindling Returns

The Times offers some advice to those who hold underperforming endowment policies which look like missing their targets:

"In the light of dwindling returns, investors should be asking themselves whether they want to keep their with-profits policies or head for the exit."

In essence, it is a keep or sell decision.

Thursday, March 06, 2008

Pass The Parcel

Pass The Parcel

The endowment scandal has created a legal version of pass the parcel as policyholders claim damages from those who mis-sold these useless products and they, in turn, claim damages from insurance companies etc.

Legal Week recently reported that Reynolds Porter Chamberlain (RPC) is facing a multimillion-pound negligence claim relating to its involvement in a case brought by Standard Life.

Standard Life Assurance recently won a case against AON, and stands to be awarded up to £75M.

Aon has brought its own negligence claim against RPC, as a third party to the proceedings, and a second trial will now take place to decide whether or not the firm was negligent.

Aon's claim against RPC argues that the firm did not recognise that the wording of the policy meant claims could not be grouped together.

Now don't you think that all this trouble, time and expense could be avoided if the life assurance companies simply underwrote these useless, underperforming and badly managed polices?

Wednesday, March 05, 2008

Sir Nicholas Montagu

Sir Nicholas Montagu

Liberal Democrat Treasury spokesman, Vince Cable, has questioned the impartiality, effectiveness and independence of the Norwich Union With-Profits Committee (set up to protect the interests of policyholders).

He is concerned about Norwich Union's plans to distribute a proportion of its inherited estate to policyholders over three years, as opposed to a one off lump sum payment.

Mr Cable wrote to Sir Nicholas Montagu, chairman of the committee, questioning the committee's role in allowing the special bonus to be phased over three years.


"Your committee has been established to protect the interests of policyholders and yet in your first public act you seem to have destroyed any prospect of being seen as a credible champion for them."

Montagu, a former civil servant who presided over the Inland Revenue during a period of bungles and who now gives after-dinner speeches for £5K a time, is seemingly reluctant to answer questions from "This Is Money" about this decision.

However, Montagu is paid from policyholders' funds to safeguard their interests therefore he is obliged to answer questions from policyholders.

Policyholders should send their complaints, comments and any queries relating to his role to:

Sir Nicholas Montagu,
Norwich Union With-Profits Committee,
Norwich Union Life,
2 Rougier Street,
YO90 1UU.

With-profits committees, if they are to really serve the policyholders that they claim to represent, need to be independent, impartial and effective.

It would appear that some fall short of this.

Monday, March 03, 2008

Call For Evidence

Call For Evidence

In a move designed to ensure that another endowment related scandal does not occur, the Treasury Select Committee has called for written evidence as part of its inquiry into the orphan assets (Inherited Estate) held by life companies' with-profits endowment funds.

The call comes as concerns are raised over the actions of AXA, Prudential and Norwich Union as they attempt to re attribute their Inherited Estates.

These assets are worth billions of pounds yet, despite these funds being contributed by policyholders, some insurance companies have been using a portion of them for the benefit of their shareholders rather than policyholders.

In 2000 AXA paid out a paltry 31% of its inherited estate to policyholders, this gave rise to the FSA to creating the post of Policyholder Advocate.

Claire Spottiswoode, Policy Advocate, is currently acting on behalf of Norwich Union policyholders.

Ms Spottiswoode, who is not happy with the current plans by Norwich Union (eg to pay the policyholders their share over 3 years), has welcomed the call for evidence:

"Foremost among the issues will be the way in which the FSA allows companies to subsidise the writing of new business, which has the effect in a re attribution of transferring value from the estate directly to shareholders.

Further, the way in which the FSA allows companies to pay shareholder tax from the estate is costly to policyholders and requires explanation

The committee would like to hear about the following areas:
  • The regulatory definition of the inherited estate in a with-profits fund.

  • The extent to which life assurance companies should be permitted to diminish inherited estate in order to subsidise corporate activity, including financing new business, making strategic investments, paying shareholder tax and paying the costs of compensation for mis-selling.

  • Whether allowing life assurance companies to use inherited estate to subsidise corporate activity has any adverse effects on competition.

  • The principles that should guide the division of inherited estates in 90:10 funds between policyholders and shareholders upon re attribution of the estate.

  • The appropriate sharing of inherited estate between current and future policyholders.

  • Whether policyholders' reasonable expectations of distributions from inherited estate should be zero or have a positive value.

  • Whether any distribution of benefits from the inherited estate should be made in a single payment or phased over several years.

  • The role and responsibilities of the Policyholder Advocate.

  • The framework for negotiation between the Policyholder Advocate and the life assurance companies.

  • The role of the with-profits committees of life assurance companies.

  • The approach of the Financial Services Authority to the issue of inherited estate.
Written evidence should be sent to the committee at this address Parliamentary Committee.