Patrick Collinson
guardian.co.uk, Friday 16 July 2010 11.30 BST
Standard Life said 97% of its mortgage endowment policies would not pay off customers’ home loans Standard Life is just one of many endowment suppliers whose average return would have been bettered by a typical building society account. Photograph: Murdo Macleod
Endowments continue to provide dismal returns for savers, with many paying significantly less than the money put in after 15 years of investment.
Figures from industry magazine Money Management reveal the average return on a with profits endowment after 10 years is just 1.7% a year, or less than if the cash had been left in the typical building society account.
The average figures for endowments maturing after 25 years are much better, but flattered by the outcomes from a few small players. Big providers, such as Standard Life, Scottish Widows, Eagle Star, Pearl and Sun Alliance, are paying around 5% a year on policies taken out in the mid-1980s, when endowment sales were at their peak. At the time, customers were told their savings should grow at least 10% a year and should easily pay off the mortgage. The reality has been rather different. Money Management's figures show the biggest provider, Standard Life, which at the sales peak had more than 1 million endowment holders, is paying £29,166 on a policy into which someone has been investing £50 per month since 1985. That compares with £40,000 if the saver had invested in the typical UK unit trust, and is only £5,000 better than if the cash had been put in a typical deposit account and left there for 25 years.
Back in 2001, Standard Life was giving policyholders who had saved £50 per month for 25 years a very attractive £110,000. By 2006 this had fallen to £41,806, and this year it fell again.
Insurers blame the collapse in inflation and interest rates for the worse-than-expected returns, arguing their projections of 10%-a-year gains made sense in the more inflationary 1980s. But critics point to excessive charges, which at the time were not made clear to customers. Endowments sold in the 1980s and early 1990s used "standard charge projections" determined by the industry's former regulator, the Life Assurance and Unit Trust Regulatory Organisation (Lautro). But these projected charges were significantly below the charges levied, with much of the money going into the pockets of commission-based salesforces.
Around £400bn sits in the coffers of Britain's with profits funds in the form of endowments and savings bonds, much of it in "zombie" funds where the insurer is closed to new business. Money Management's figures indicate these zombie funds (including Life Association of Scotland, Colonial and Crusader) are among the worst performers. The once-giant Pearl is among the biggest offenders, giving investors negative returns after 15 years. Someone who started a £50-per-month Pearl endowment policy in 1995 and wants to cash it in now will get only £8,867 for their £9,000. The smaller Colonial Life will pay even less – £7,632.
There are a few star performers, but they are largely at companies which had a tiny market share. There are also some anomalous figures, such as at Phoenix Assurance.
It is paying a bumper £184,303 on a 25-year, £50-a-month endowment, representing an extraordinary 16.8% annual gain. But Phoenix Assurance was a small with-profits fund that closed in the late 1980s and has in recent years been paying huge terminal bonuses to the last few policyholders. If you have one of these policies, keep it. But the lesson of the last 10 years is many people would have been better off cashing their policies or selling them to an endowment market maker, rather than continuing to pay premiums.
From guardian.co.uk published on Friday 16 July 2010 11.30 BST
