Secrets of Success: The 'scandal' of endowment mortgages

Like most people, I suspect, I have yet to work my way through Lord Penrose's report on Equitable Life, but I have read the key passages and find his version of how the crisis developed entirely plausible. Anyone who followed the industry at the time was aware that Roy Ranson, who combined the roles of senior actuary and chief executive, and who shoulders most of the blame in the report for management's failings, was a powerful personality who brooked few arguments within or outside his organisation.

It is also entirely in keeping with industry practice and human nature that the "smoking gun" of the guaranteed annuity rate (GAR) policy which, according to Lord Penrose, led the society to overdistribute on such a large scale before the House of Lords blew its cover, should have been concealed from prying eyes - including those of a compliant board of directors - for a number of years.

One could wish that the five law lords had devoted more time to thinking through their quixotic judgement which, whatever the roots of the GAR problem, undoubtedly contributed to the injustice of the outcome for millions of policyholders.

Whether it is practical to expect regulators to have seen through the conflicting actuarial statements and spot developments in time to halt them is another matter. Lord Penrose seems to give the regulators some benefit of the doubt.

The sad truth is that if you have to rely on regulators to prevent bad outcomes such as this one, you are already in trouble.

It is unrealistic to assume that a regulatory system can catch all cases of bad practice, and the only sure defence for investors is to take greater responsibility for their investment decisions.

Events at Equitable Life and, more recently, at Standard Life have highlighted how difficult it is for policyholders, even in a mutual society, to monitor the performance of the management effectively.

In fact, the question is whether anyone should commit more than a fraction of their funds - or the bulk of their financial future - to a life company. Although I am no great fan of the House of Commons Treasury select committee, it seems to me that they land some telling punches on the life companies in their report this week on mortgage endowments.

Ironically it is not clear to me that there is much of a "scandal" in the endowment-selling craze of the 1980s and early 1990s. The Association of British Insurers is right to say that most of those who took out endowment mortgages have benefited enormously from the same fall in interest rates that has led many policies to fall short of their projected target figures. The value of their houses has also increased by a multiple of any shortfall they may be facing on their endowments.

If people have squandered all the gains from lower mortgage payments and neglected to make good the inevitable shortfall, it is - or should be - as much their fault as that of whoever sold them the policy.

Although there are clearly some genuine hardship cases, which I don't seek to minimise, in aggregate this seems to me to be a "scandal" without too many ostensible victims.

The fact that events have turned out differently from what was expected at the time - the tax relief that made endowments cheaper has gone, and investment returns are lower than those projected - is what is known as "the real world".

Hiding behind the fact that you heard a salesman tell you 20 years ago that your policy was guaranteed to pay off the outstanding mortgage is a feeble excuse for permanent inaction subsequently - although the media and financial advisers should have latched onto the problem at an earlier stage.

By their own admission the life companies have not covered themselves in glory. Even their best friends would not describe them as consumer-friendly or fast-moving. They were late to wake up to a changing tax and investment climate, which eliminated the advantages of endowment mortgages over other forms of payment. Their record as investment managers is indifferent and they have been slow to deal with complaints. Their information technology and customer care systems are overloaded. The main reason they are effectively waving through a large number of compensation casesseems to be because they have no records to prove what was or was not said at the time of sale.

This sits oddly with their claim that they still have the best interests of the long-term saver at heart. The same goes for all those savers who are now in closed funds, denied - as the Treasury select committee rightly points out - the opportunity to keep their money in an investment fund that has the same objectives they chose when they first committed their money. A genuinely customer-conscious company would find a way to offer those trapped in closed funds the opportunity to transfer to a fund that did what it originally promised at no additional cost.

The truth is that, as nearly every independent observer has commented, the life industry remains a sales-led business in which the voice of the consumer is not heard strongly or early enough.

The main selling point of the big life companies is their "financial strength", but even that has often turned out to be illusory, and comes with a price of bureaucratic and managerial sloth. Paying sales commissions remains the Achilles' heel of the industry, to the point where it is impossible with some providers to pay more money into your pension fund unless you do so through a fee-earning independent financial adviser.

The exciting thing is that technology is changing the playing field for most savers. There is little need to rely on a life company to manage your long-term savings, particularly with the drawbacks that entails.

There are other, more accountable, ways to achieve the outcome you desire, although it does involve shouldering some of the investment decision-making yourself. But which would you rather do? Take those decisions yourself or leave it to a large life company? Unless the industry miraculously transforms itself, which is always possible, the gradual erosion of the life industry's dominance in long-term savings will, I suspect, be one of the long-term "goods" that comes out of the Equitable Life

jd@intelligent-investor.co.uk