I was letting my fingers do the walking through Yellow Pages the other day when I noticed that after hi-fi manufacturers and wholesalers was the intriguing category of high commission. Then I saw that underneath it said: “See embassies and consulates.” Proving, once again, that things are not always what they seem.
I recently read that every maturing Norwich Union endowment paid off the home loan amount last year. My colleagues and I have seen similar results from a variety of companies. In recent weeks, a client bought a new car with his excess money. Another will now be able to pay for a child's much-needed surgical operation. This is, of course, factual information.
However, past performance is no guarantee of future results. What about policies not yet matured? An unwelcome three-year bear market is affecting current bonuses.
But when I recently saw an article claiming that a quarter of mortgage endowments maturing this year will fail to pay off the home loans they are supposed to cover, I wanted to bid for the crystal ball they were using. “Will fail” is an assertion while “supposed to cover” implies incorrectly that illustrations (which were drawn up in accordance with regulatory requirements) did not state that the maturity value depended on certain growth assumptions.
It seems common for life offices and financial advisers to let anyone say whatever they wish about our products and services without any hint of robust defence.
Of course, we are now seeing lower bonuses. Some policies will undoubtedly not hit their original targets. But estimates should not be presented as facts. I do not accept as accurate the published list of life offices showing the percentage of endowments which will mature with shortfalls in 2003. We do not know yet – the figures could be better or worse. Who knows yet what the figures will be?
The data used has led to a sensationalist headline conclusion. The article might turn out to be prophetic or even inspired guesswork but, unlike actual maturities, it is not fact. I will tell you why.
Life companies will not tell us the actual maturity value of an existing policy until a few weeks before maturity. So how can anyone assert now that 25 per cent of this year's maturities will fail?
Companies produce projections based on the regulatory guidelines – currently 4, 6 and 8 per cent annual growth rates. The starting point for such projections is a penalised value and an assumption is made about charges which may be more or less than the individual company's charges. Some companies are deducting their MVA to project an estimated maturity value – to which the MVA does not apply.
We recently had a copy of a reprojection letter stating: “We are pleased to confirm that your plan will repay the target amount of £23,100.” Naturally, as an IFA, I homed in on the word “will” as the reprojection figures showed a shortfall at 6 per cent a year. The clue is in the actual performance. The basic sum assured is £13,652 and attaching declared bonuses to date are £10,241 so the guarantee is £23,893 already. So it “will” mature for at least the target amount despite the reprojection figures. Not typical, perhaps, but it is absolutely vital to look at bonuses already added and guaranteed.
I would be interested to see an article which shows the actual number of shortfalls this year and then compares this figure with the table just published, which is based on projections.
Life offices should not be allowing such assertions to go uncorrected. Assumptions presented as facts are dangerous, whether we are financial advisers or journalists.
I am bound to say that financial services companies are very good at rolling over and taking the flak every time a criticism is made of our products and services based on hindsight or crystal ball gazing.
Criticism is sometimes justified but, frankly, we are very bad at publicising the true facts to a public who receive good news far more readily than those who look to find fault.
Len Warwick is managing director of Warwick Butchart Associates