Melanie Bien: Standard Life skewered by half-baked promise

If you make a promise, you should stick to it. That's what we were told when we were young and there is no reason why this should change as we get older.

Only it has now, with Standard Life announcing last week that it is breaking its mortgage endowment promise.

It must be said that the decision to make this pledge in the first place, four years ago, was rather above and beyond the call of duty. But it was a comfort to customers when it was becoming clear that there might be a shortfall in their maturing endowment policies. Standard Life said it would meet the shortfall if this were the case.

However, it turns out that this comfort blanket for policyholders provided only a false sense of security. We can only assume Standard Life was crossing its fingers behind its back. It was gambling that the stock market wouldn't perform so badly that it wouldn't be able to stick to its promise, and it never foresaw the severe bear market that has put paid to the promise.

In terms of business logic, Standard Life is making the right decision in going back on a pledge that is costing it £100m a year, and could have cost even more if it had continued to stick by it. Most of the mutual's endowment policies mature between 2010 and 2020 and a lot could happen between now and then (as well, of course, as the market rising again and there not being endowment shortfalls after all).

At least it is unwinding the promise now - while these investors may still have time to make up a possible shortfall - rather than leaving it until their policies mature and then telling them they're out of luck.

The decision is also sensible as far as other Standard Life customers are concerned, because it preserves the overall strength of the company. The endowment promise was becoming a drain and, given that the insurer will probably seek a stock market listing in 2006, it's important that the business appears to be strong. Endowment holders who are also members may lose out on their policies, but hopefully they will benefit in the long run with a tasty windfall once the insurer demutualises.

I don't have a problem with there not being an endowment promise at Standard Life any longer - unless customers were mis-sold their policy and not made aware of the dangers (and if they were, they can still pursue this claim). It's part and parcel of investing on the stock market.

Endowments aren't guaranteed to produce returns and if markets had rocketed over the past four years, rather than struggled, policyholders would be thankful they'd taken on that risk.

But I do have a problem with an organisation which says it is going to do something - in this case, make up any shortfall in endowment policies - and then doesn't. Scrapping the promise may be a sensible decision, but it's a bitter pill for endowment holders to swallow. That the business will be stronger is small comfort to those who thought they were going to be all right even if their endowment under-performed, because the insurer they'd invested with had told them this was the case.

It's one thing to expect to deal with a shortfall yourself and do something about it; quite another to be told that someone else will sort it out so you don't have to, and then to hear that they have changed their minds. Standard Life endowment holders have lost four years when they could have been making up a possible shortfall in their policy - and can only now start to rectify the problem.

What is of even more concern is that these policyholders may not have taken action four years ago, even if they had known that they should do so. Over half of all homeowners who have been told their endowment is unlikely to produce enough funds to pay off their mortgage have yet to do anything about it, according to mortgage broker London & Country.

It is not all bad news for Standard Life policyholders. The life insurer is still strong and still delivering good value for money, according to pensions experts. And, however let-down policyholders feel, it is better for them that the company is run well than that it makes and honours promises it can ill-afford to keep.

But with consumer confidence in insurers at a low, Standard Life has done nothing to help itself or the industry.