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Is the promise falling short?

Samuel Johnson described a promise as the soul of an advertisement. Perhaps this was in the minds of Norwich Union, Standard Life and AMP Pearl when, as the mortgage endowment controversy broke, they promised to make good shortfalls.

But now this promise is being questioned after NU mailed of its mortgage endowment policyholders, warning those who have less than five years to go to maturity that they should make arrangements to meet shortfalls.

The promise from NU came with a proviso – shortfalls would only be met if the policyholder was projected to have a shortfall at the time of the promise and investment returns were above 6 per cent.

Since the pledge was made, equity markets have plummeted and a 6 per cent return looks decidedly optimistic.

CGU – before the merger with NU – was the first company to make the promise, in January 2000. A year later, the merged company applied the promise to NU policyholders as well. It was followed by Standard Life in September 2000 and AMP Pearl in March 2001.

So is NU guilty of promising an umbrella on condition that if it rains they can take it back?

NU feels it is being pilloried. Senior actuary David Riddington says, unlike many of its competitors, it has done something to help policyholders. He also makes it clear that NU is not ducking out of its commitment and that nothing concerning the promise has changed.

Riddington says. “With the benefit of hindsight, it would have been good to have introduced the promise earlier. If we had introduced it before, it would have made managing it easier and we would have had the benefit of a couple of good years performance in the stockmarket. Since the promise, the stockmarket has been as bad as it is possible to imagine.”

While the terms of the promise have not changed, Riddington says the company was careful not to use the word guarantee. “This never was and was never intended to be an guarantee that, in all circumstances, shortfalls would be met. No one will ever be able to it – the economics of it are not possible.”

Kangley Financial Planning managing director Geoff Kangley welcomes the fact that NU has not given some Equitable Life-like guarantee that would have been exorbitantly expensive and potentially disastrous.

But Dennehy Weller managing director Brian Dennehy says: “It is not much of a promise at all. They should have made it clear in the first place that there could still be a shortfall.”

Promises and guarantees, especially after the infamous guaranteed annuity rates, are always going to be contentious.

According to Axa investment marketing manager Mike Mumford, consumer research shows that people do not trust the word guarantee.

For its newly launched distribution bond, aimed at filling the gap left by its retreat from with-profits, Axa made the conscious decision to use the word protected instead.

While Standard Life&#39s promise on mortgage endowments mirrors that of NU, its position differs. Standard says all its with-profits mortgage endowments stand to benefit from the promise as its returns on with-profits have been at least the 6 per cent required. Of its 200,000 unit-linked endowmentholders, around 75 per cent face shortfalls.

For Dennehy, this raises the controversial question of Standard&#39s withprofits bonus policy and he has written to the company asking for more detailed disclosure so he can still recommend the company&#39s products.

A Pearl spokesman accepts that, given current fund performance, there will be policies with shortfalls and it is reviewing its position.

Product providers and intermediaries point out that consumers have benefited from falling interest rates at the same time as the performance of endowments has suffered – at least compared with the original investment assumption made when endowment policies were sold in large quantities in the late 1980s and early 1990s.

But for IFAs wanting to contact their clients to give them advice, there could be a spanner in the works. Kangley says his PI insurer has told him that mailing his clients could invalidate cover.

The advice given to policyholders with impending shortfalls is not always straightforward.

Dennehy is advising clients to get cash values for their policies and find out how much terminal bonus they have built up which could be at risk from further stockmarket turbulence

He points out there is the danger of policyholders paying into their endowment for the next five years only to find out it is worth no more than it is today.

However, he also says he has yet to see a client with a maturing with-profits endowment showing a shortfall.

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