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A Consumer&#39s View

News that yet another life company has withdrawn from the endowment

mortgage market is an indictment of intermediaries&#39 selling methods,

typifies over-reaction by naive regulators and is a condemnation of

sensationalism by the press. No one comes out of this latest endowment

misselling debacle well – including journalists.

Winterthur Life, the life subsidiary of Swiss giant Credit Suisse,

recently announced that it has ceased selling endowment-linked mortgages

after a slump in sales. As Provident Life, it was one of the biggest

sellers of endowment-linked home loans along with Standard Life.

Whether or not you believe endowment policies should be linked to

homeloans – and I personally do not believe they should – the fact remains

that with-profits endowments are probably the only worthwhile product the

life companies have left to sell apart from pure protection such as

whole-life and term insurance.

Most investors in unit-linked products would be better off buying unit

trusts and putting them into an Isa or Sipp.

Far too many savers have all their money in a building society savings

account pay-ing little or no interest and with no hope of any capital gain.

For generations of investors, with-profits endowments have been the first

step in equity investment.

With no downside risk, they are the ideal product for first-time equity

investors and have shown handsome returns averaging 14 per cent a year or

more until recently. Even today, they are showing average returns of 10 to

12 per cent on long-term policies. Where else can investors get this sort

of return with no downside risk whatsoever?

It raises important questions for mutuality, too. Standard Life hailed its

recent victory over Fred Woollard and the carpetbaggers as an endorsement

of the merits of mutuality. It was no such thing.

Standard Life delayed sending out its endowment review letters, which

would have shown that around 500,000 investors have a shortfall on their

mortgage-linked policy and will probably need to top it up, until after the

vote. None of these policyholders would have voted in favour of the status

quo had they known of the shortfall.

Quite apart from this fact, only half those eligible to vote actually

bothered to do so – admittedly, not Standard Life&#39s fault.

But more than half of all policyholders were disenfranchised because they

did not hold with-profits policies. These were likely to be the more recent

and more sophisticated investors – precisely the individuals whom Standard

Life wanted to keep out.

The biggest condemnation of mutual status as typified by Standard Life is

that the vast majority of policyholders have no say whatsoever over the way

their company is run or its future. This cannot be right.

Of course, with the recent endowment review, Standard Life may well decide

to pull out of the with-profits endowment market, too, thereby ensuring

that in future an even smaller proportion of policyholders will be entitled

to vote.

Shareholders are not necessarily any less apathetic than members of mutual

societies but, if they don&#39t vote or take an interest in their company,

they have only themselves to blame.

The unit-linked investors in Standard Life, who now constitute the

majority, are totally disenfranchised.

The regulators have all but killed off with-profits policies, by far the

most suitable investment for risk-averse novice investors, by making the

conditions for qualifying for stakeholder status so onerous as to

effectively rule them out. This is ridiculous.

With-profits endowments (as distinguished from unit-linked endowments) are

– still – an excellent product desp-ite the misselling by intermediaries,

over-reaction by regulators and scaremongering by the press.

If the sale of this excellent product was simply disconnected from

mortgages, where it never belonged in the first place, it has a real role

to play in many investment portfolios.

Those who borrow money to buy a house should arrange to pay it back in the

usual way. If they then choose to save alongside in a with-profits

endowment, that is another matter entirely. It is the linking of

with-profits endowment to mortgages which is the problem, not the product.


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