The bad dream continues for life offices as the endowments crisis shows no signs of letting up.
Life offices simply cannot seem to shake themselves awake from the endowment nightmare.
The bad dream is set to continue as Money Marketing recently revealed that 40 per cent of the 10 million letters going out to consumers warning of shortfalls are understood to be in the red or “definite risk” category while a further 20 per cent are in “some danger” of a shortfall or amber category.
Life offices are advising policyholders to contact IFAs for advice.
The letters explain how the investment climate has changed and, where appropriate, give policyholders advice on what to do if there is a shortfall.
Options being offered by life offices include increasing the savings amount to make up the shortfall, extending the term of the mortgage, using other forms of saving to pay off the mortgage in a lump sum or changing part of the mortgage loan to a repayment loan.
Scottish Widows head of corporate communication Alan Young says: “Our letter explicitly states to policyholders that, if they are not sure what options to go for, then they should contact a financial adviser.”
Many providers have set up phone helplines dealing with policyholder concerns.
Royal & Sun Alliance protection leader Fiona Matthews says: “We are trying to explain to people why the letter was sent out, as many of them do not understand the situation. The majority of people have been quite understanding that, during the duration of their mortgage, premiums have gone down and that means projections for endowment policies have also gone down.
“We are telling people about their options. But it is different for everyone and we must consider their financial circumstances. We are explaining the different financial options and suggesting if they want to discuss their options more fully to speak to a financial adviser.”
Some IFAs are advising clients to save money in an alternative investment venture.
IFA Dover Financial Services principal Tracey Case says: “We have suggested clients do not throw good money after bad and should fund any shortfall by saving through Isas or converting part of the mortgage to repayment.”
There is also concern from IFAs that some customers might be confused by the letters and automatically assume they mean the worst.
Case says: “We have had people coming in with good policies, such as from CGU, and are still concerned about shortfalls although they have a guarantee.
“The letter being sent out says there should be a 6 per cent rate of return but does not tell customers what is actually being achieved and so the letter is confusing people. This is leading to a lot of people ignoring the letter because they do not understand it.”
The “promise” offered by CGU in January is to top up terminal bonuses if investment earnings fall below 6 per cent.
Public relations manager Fran Elliot says: “We decided prior to requirements that we would look to reassure customers that they did not have anything to worry about. This is why we have not had to send any red or amber letters.”
Elliot denies this promise is a risk for the company and explains that, even if investment earnings were to fall below 6 per cent, it would cost the company almost nothing in paying out these bonuses. She says the actual cost would be at most 1 per cent interest on the CGU life capital and would not cut into reserves.
Elliot says other life companies would be unlikely to follow CGU’ example. She says: “We were able to support an offer like this because we have financial strength. Other companies would not be able to afford to do this.”
Some IFAs feel they need to take a more direct approach to calm client concern. Bently Jennison Financial Services is writing to all its clients holding endowment policies to advise them to get in touch if they have any concerns regarding possible shortfalls.
Financial adviser Val Beardmore says: “We are explaining why the letters have been sent out and advising clients about the current rates they should be receiving.”
Although many life offices have withdrawn from the endowment market, Beardmore says this has not stopped them from advising clients to take up endowment policies.
She says: “We will still set up endowment mortgages if is the right recommendation for the client.”
The industry may be claiming policyholders have so far taken the news of the shortfalls calmly but there have already been cases of policyholders demanding compensation.
Even though compensation guidance will not be issued by the Financial Ombudsman Service until the autumn, Scottish Widows has already had to deal with cases.
Young says: “Out of 140 complaint cases so far, only five have resulted in compensation. Two of these were cases of misselling and three were cases where the term was inap-propriate. We have estimated from our 260,000 policies that less than 0.5 per cent will equate to compensation payments.”
Industry opinion suggests it is still too early to judge the public’ reaction.
According to the ABI, only a quarter of the 10 million letters have gone out so far and, as they will continue to be issued throughout the next year, this is a matter that will not disappear.
Policyholders will become aware of the problems through the media even if they have ignored their letters. Inevitably, as public awareness increases, the number of complaints and compensation claims will grow. The nightmare continues and the nights are drawing in.