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Insurers fall short

The latest figures from the Financial Ombudsman Service indicate that we are approaching the tail end of the calamitous mortgage endowment complaint fiasco.

There were a number of drivers for this particularly nasty episode. First, in recognition of low inflation and potentially lower growth, the regulator decided in 1999 to reduce the standard growth projections from 5, 7.5 and 10 per cent to 4, 6 and 8 per cent. This may have been prudent for new business projections but it had the undesirable backlash of making virtually every existing endowment plan appear off course.

During the 1990s, the typical growth rate used for endowment plans varied between 7.5 and 8.75 per cent, so even if a plan was growing at the assumed growth rate, it now appeared behind target using the notional 6 per cent projection.

Second, this change coincided with a severe stockmarket downturn. Third, the regulator decided that from 2000, all endowment providers would have to send reprojection letters at least every two years advising policyholders as to whether the plan was on course.

The fourth driver was the use of the theoretical Lautro charges by 12 insurers to set premium levels. This ensured that plans were not on course from day one and this fed through into the reprojection figures.

The reprojection letters looked uniformly dreadful and this excited the interest of certain parties looking for the main chance – the ambulance-chasers, soon to be rechristened as claim management companies.

A combination of unrest from consumer journalists and Which? led to the next development, which was the use of traffic light markings and standard wordings designed to encourage policyholders to make decisions.

This brief history will be known to many but what will not be widely appreciated is the fifth driver, the part played by the insurers themselves. This was a classic case of foot-shooting which highlighted their utter incompetence in the field of public relations.

I refer to the dubious and startlingly dreadful mechanisms that are used to project future maturity values.

This matter was brought to my attention again this week when I received a copy of a maturity advice letter from Axa in respect of an Equity & Law with-profits endowment. Last June, its reprojection letter advised that using 8 per cent growth, the plan would achieve £7,160. This year, the advised maturity is £7,889, showing just over 15 per cent final year growth.

Of course, this is due to a terminal bonus and most advisers will have highlighted this likelihood to their concerned clients. What it clearly shows is the nonsense that results when a company uses the current surrender value as the basis for projecting ahead, something that Axa chooses to do. It is not alone in using this device and as it is well known that poor reprojections lead to complaints, I wonder how much such practices have cost them and the IFAs who arranged the policies?

This column would not look balanced if it did not contain at least one reference to the retail distribution review and I note that another industry commentator has called for RDR action to counter consumers’ lack of confidence in the industry. This is a common thread of many submissions, yet the issue of confidence extends to many areas beyond the control of the regulator and therefore the scope of the RDR.

In recent years, we have experienced the Chancellor’s annual £5bn tax on pension funds, the scandalous treatment of Dexion, ASW and other dispossessed pensioners, the stockmarket crash and current volatility and the massive profits of the banks, followed by their current woes.

The public often look at financial matters as a whole and the negativity highlighted above feeds through to their opinions of personal finance. There is a great danger in crying wolf one too many times, only to see the jaws still slathering when the industry has been torn apart by incorrectly thought out “solutions”.

Alan Lakey is a partner at Highclere Financial Services

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