John Willcock

'Sorting out the endowment mess is going to be along, hard slog'

Standard Life, which has a fifth of the UK pensions market, cut its pensions charges by 40 per cent this week, and promised help for endowment mortgage borrowers, in a move which will benefit 1.5 million customers.

Standard Life, which has a fifth of the UK pensions market, cut its pensions charges by 40 per cent this week, and promised help for endowment mortgage borrowers, in a move which will benefit 1.5 million customers.

The good news was on pensions charges, while the "guarantee" to help homeowners whose endowments may not grow fast enough to pay off their loans was rather more limited.

But Standard Life's decision to cut all its annual pensions charges to below 1 per cent is a boost for pensioners. New customers will benefit from the lower charges from December, and the company's 700,000 existing pensions customers from April, when the government's new stakeholder pensions come in.

At the moment, many pensions products have high intitial charges, some of which swallow up an entire first year's premiums, followed by at least three other types of charges. Under Standard Life's new structure, the company will take only an annual charge.

This does not mean that your premiums will come down, rather that the pension you receive will go up. With a lighter burden of charges, your pension fund will grow faster. Legal & General pointed out last week that although stakeholder pensions are limited to a 1 per cent annual charge, 1 per cent at the end of a pension's life is proportionately a very heavy charge. Standard Life has got round this by tapering its pension charges as they approach maturity.

Standard Life says it is able to do all this because it has remained a mutual, having fought off one hostile carpetbagging proposal this year (it is currently facing another). The credit should really go, however, to the government, which introduced the stakeholder scheme in the first place, in an attempt to persuade the less well-off to save for old age. There is now evidence of a knock-on effect on all pensions charges.

Norwich Union, which is relaunching next week following the merger with CGU, is also cutting pensions charges, though not as far as Standard Life. With any luck this trend will accelerate. The Blair government should take a pat on the back for that, at least.

This week, Standard Life also issued an "endowment promise", guaranteeing that every one of its endowment policies will meet its targeted value, provided the company achieves a return of 6 per cent on its investments and a 0.6 per cent annual growth in its free capital - that part of a company's capital not allocated directly to customers' benefits.

If homeowners are looking at a shortfall in their ability to pay off their loan, the company will make up for it with a higher terminal bonus at maturity. Standard Life has devalued this guarantee by saying it only works as long as the company's life fund grows at least by 6 per cent per annum. Low inflation and low interest rates means that stockmarket returns are steadily falling, and a target growth rate of 6 per cent over, say, the next 25 years, looks optimistic.

Butit's a start. On Thursday, after Standard Life had announced its cuts, Liverpool Victoria issued a more ambitious guarantee, promising there would be no shortfall on the maturity value of customers' existing with profits mortgage endowments regardless of future investment earnings. This isn't so brave when you remember that the friendly society has just 7,000 endowment mortgage customers, but it all helps.

The Financial Services Authority (FSA) is due to make a big announcement this week about the endowment mortgage problem. While the pensions scene is improving, sorting out the endowment mess is going to be a long, hard slog.

The writer is Personal Finance Editor of The Independent

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