The Endowment Diary

The Endowment Diary


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

Wednesday, October 29, 2008

Norwich Union Imposes Penalties

Norwich Union Imposes Penalties

Norwich Union has imposed hefty exit penalties on customers' holding with-profits policies.

The market value reductions (MVRs) of between 13%-22% are a heavy blow to the already beleaguered with-profits (hardly an apt name given the ongoing diminution in value of these useless products) policy holders.

The MVRs will apply to about 1.2 million of Norwich Union's 2.4 million holders of with-profits pensions, bonds and endowments.

John Lister, Norwich Union's chief actuary, is quoted in the Times:

"Since the beginning of the year we have seen equity markets, commercial property and corporate bonds fall significantly in value.

MVRs are a mechanism to ensure that those policyholders leaving or wishing to take money out of the fund do not take more than their fair share of the fund at the expense of those policyholders who remain

All very well but I wonder, if the with-profits funds had been better managed and profits/losses smoothed, whether such a drastic step would have been really necessary.

Monday, October 27, 2008

What Happened To Smoothing?

What Happened To Smoothing?

The Times reports that:

"Legal & General has become the latest insurer to cut terminal bonus rates on with profits funds. The FTSE 100 company is cutting rates by between 5 and 9 per cent in the wake of falling and turbulent stock markets.

The move means that a 25-year £50 a month mortgage endowment maturing will pay £38,565 compared to £41,293 before the reduction. A 20-year £200 a month pension maturing after this change will pay £90,999 compared to £98,511 before the change.

Mark Gregory, managing director of with profits at L&G, said the decision would affect 10,000 of the company's 800,000 policyholders. He added: “We have made the decision to reduce final bonus rates to take account of some of the negative movements in the investment markets.

'In making these changes, we are ensuring fairness between all of our customers, whether they are leaving or remaining in our with profits fund

Am I alone in believing that the concept of a "with profits" (a somewhat ironic name under the circumstances) fund is that the "profits/losses" are smoothed over the period of the policy in order to minimise wild fluctuations in returns?

Surely, if these policies had been well managed by L&G, such a large reduction in one year would be unnecessary?

Thursday, October 16, 2008

Market Falls

Market Falls

It should come as no surprise to anyone with an endowment policy that the ongoing falls in the stock market will negatively impact the returns on the already poorly performing endowment policies.

However, another issue that may also affect returns is the level of involvement by the life assurance companies in complex financial instruments (eg credit default swaps).

Exactly how exposed are the life assurance companies to these instruments, and what effect will that exposure have on the stability of the endowment policies managed by these companies?