I remember back in 1984, when I was an official in the DTI insurance division, my boss popping into my office and saying “I've just had the Inland Revenue on the phone and they are proposing to withdraw the tax relief on life assurance premiums. I told them it was all right. Did I say the right thing?” Of course in the Budget of that year, life assurance premium relief was withdrawn and I suppose the ground was laid for the charges of misselling of endowments.
The problem we face need not have come about if the industry had acted with a lot more co-ordination and regard for the consumer. It is, of course, still the case that many 25-year policies maturing now show a very good return.
I remember puzzling back in the 1980s how calculations, despite the loss of the tax relief, could show endowment policies as a cost-effective way of paying off your mortgage.
Consumers wanted to see their outgoings less, particularly in the early stages of the mortgage, so were attracted to low-cost endowments. In the endeavour to demonstrate the low-cost endowment might show a decent return, the race to announce higher bonuses started and over-distribution eventually afflicted companies such as Equitable Life.
What the industry should have done once interest rates and potential bonuses started to fall was to brief consumers more clearly whether or not a policy was on track. Practical advice could have been added so the consumer was set to deal with any shortfall by setting aside other savings, presumably the difference between what they would have paid when interest rates were higher and what they were now paying. House prices inflated at an even faster rate, so the return on that investment, for people who moved, could have helped defray costs from less well-performing endowments.
My concern is that the endowment issue is causing so much bad news for the industry that it needs to be brought to the point of closure. Trying to mount the arguments which show that it is not a black and white situation is a complex matter. Those who are campaigning for endowment compensation, are given ample opportunity for ignoring the realities.
The industry has been wrongfooted and we need to make sure that we do not continue to fall into traps of this kind if we are ever to do anything about our reputation. Any ideas?
John Ellis is head of public affairs at the LIA