The good, the bad and the mediocre

ENDOWMENTS

One of the drawbacks of compulsory disclosure of charges is that they can be the focus of a disproportionate amount of attention in the year the rules take effect. That is not to excuse the life industry for the often outrageous charges it levies on investors. But management costs are only one element.

Since the beginning of this year, life offices have been required to show how their costs affect your investment. It has come as something of a shock to many with-profits endowment policyholders to learn that their providers have been creaming an average of 1 per cent a year off their investment. A small proportion of that, perhaps one tenth, will represent the cost of life assurance cover. But over 25 years, more than one quarter of the investment return can disappear in charges.

Concern was heightened last week by the publication of the Office of Fair Trading report on mortgage repayment methods, which concluded that high-charge endowment mortgages could cost homebuyers significantly more than the traditional repayment equivalent.

The decision to opt for an endowment mortgage depends on the borrower's view, on the long-term performance of the markets in general and of individual life offices in particular. As the tables show, both investment performance and management charges vary enormously. And while the total charges can appear colossal, often running to more than £12,000, the most significant factor is likely to be the investment performance of the fund.

Past performance is no guide to the future. But clearly the trick is to pick a life company with low charges, a proven investment track record and realistic growth assumptions.

The choice could prove crucial. A 29-year-old man who took out a with- profits endowment policy with General Accident (below average costs and better than average performance) 25 years ago would now be £20,000 better off than one who invested with Guardian.

A third factor, although it is difficult to compare, is the free asset ratio of the life office. This percentage figure is an unsophisticated pointer to the company's financial strength. The bigger the ratio, the more tucked away for a rainy day.

Companies with high free asset ratios (General Accident, Pearl, Refuge, Commercial Union) have more freedom to invest where they want if they need to boost performance after a lacklustre spell.

Clearly there is more risk with endowment mortgages than the repayment type. But pick the right one and it can still pay. The OFT report concluded very low charge endowments would out-perform straight repayments in most instances.

The real damage is done when investors surrender policies early. More than half the total maturity value on with-profits policies comes from the terminal bonus. And because most of the charges fall in the early years, policyholders will always be left seriously out of pocket if they surrender early.

ENDOWMENT PAYOUTS

Payouts on a 25 year mortgage endowment policy for a male non-

smoker aged 30 next birthday, making a monthly contribution of £30.

Company 1995 £ 1994 £ % Change

Commerical Union 64,798 65,599 -1.2

GA Life 64,070 65,604 -2.3

Royal 63,173 61,172 +3.3

Standard Life 62,080 63,832 -2.7

Clerical Medical 61,635 60,820 +1.3

Axa E&L 61,477 62,660 -1.9

Scottish Widows 60,856 61,479 -1

Scottish Mutual 60,693 63,217 -4

Legal & General 60,574 62,043 -2.3

Royal London 60,159 62,014 -3

Scottish Life 59,687 63,252 -5.6

Friends Provident 59,444 60,667 -2

Scottish Amicable 58,371 59,673 -2.2

Britannia 58,281 n/a n/a

Prudential 56,593 58,044 -2.5

Scottish Provident 55,657 56,760 -2

Norwich Union 55,136 58,695 -6

Sun Alliance 48,110 52,993 -9.2

Sun Life 45,933 47,696 -3.6

Guardian 44,062 44,379 -0.7

Source: Money Marketing

EFFECT OF CHARGES ON ENDOWMENT YIELDS

Office Projected reduction Past performance ave Past performance

in yield % pa reduction in yield % pa net returns to

policyholders (% pa)

10 yr 25 yr 10 yr 25 yr 10 yr 25 yr

AXA Equity & Law 3.2 1.3 3.5 1.1 10.7 13.1

Britannia Life n/a n/a 4.0 ns 7.5 n/a

Britannic 3.1 1.6 3.0 1.0 9.8 12.6

Clerical Medical 3.1 1.2 2.8 0.6 11.1 13.0

Commercial Union 2.7 1.2 2.8 1.0 11.4 13.5

Co-operative 2.2 0.9 3.8 1.6 11.3 12.6

Eagle Star 3.9 1.3 4.4 0.9 8.3 12.9

Equitable Life 1.4 0.4 2.0 0.9 11.9 12.2

Friends Provident 2.4 0.9 2.5 0.7 11.3 13.0

General Accident 2.5 1.0 2.4 0.7 11.2 13.4

Guardian 4.9 2.3 4.5 0.9 5.4 10.9

Legal & General 2.9 1.2 3.0 0.7 9.8 13.1

London & Manchester 4.1 2.2 n/a n/a n/a n/a

London Life 3.4 1.5 2.6 0.7 7.9 12.2

MGM 3.7 1.9 2.7 1.1 8.4 11.5

National Mutual* 2.3 0.9 3.0 1.3 10.4 12.3

NPI 2.4 0.9 4.0 1.2 9.4 11.1

Norwich Union 2.6 1.2 2.5 0.8 11.2 12.8

Pearl 4.0 1.6 3.9 1.5 11.1 12.2

Provident Mutual) 3.1 1.4 2.6 0.9 10.1 11.2

Prudential 2.7 0.9 2.4 0.6 9.4 12.7

Refuge 3.5 1.4 4.0 1.3 11.2 12.4

Royal Life 3.2 1.4 3.1 0.6 8.9 13.0

Royal London 3.2 1.5 4.1 1.3 12.7 13.1

Scottish Amicable 2.2 0.9 2.2 0.7 10.1 12.9

Scottish Equitable 2.8 1.0 2.4 0.6 10.4 11.3

Scottish Life 2.4 1.1 2.7 1.0 9.5 13.1

Scottish Mutual* 3.5 1.3 2.3 0.4 11.6 13.2

Scottish Provident 3.0 1.2 2.7 0.8 10.8 12.6

Scottish Widows 2.2 1.0 2.4 0.8 11.3 13.1

Standard Life* 2.6 1.0 2.3 0.8 10.7 13.3

Sun Alliance* 3.2 1.4 2.4 0.8 9.2 11.9

Sun Life 3.0 1.2 3.3 1.0 10.2 11.5

Sun Life of Canada 3.7 1.5 3.0 1.2 10.8 12.5

Wesleyan 3.3 1.1 3.0 0.8 11.3 13.4

High 4.9 2.3 4.5 1.6 12.7 13.5

Low 1.4 0.4 2.0 0.4 5.4 10.9

Average 3.0 1.3 3.0 0.9 10.2 12.5

Bold= Best 5; italics = worst 5.

* National Mutual & Scottish Mutual Personal Pension past performance is for 22 years; Standard Life & Sun Alliance is for 20 years.

Source: Kingfisher Asset Management