Firms admit endowments will not cover mortgages

Further evidence emerged yesterday that a substantial number of those who took out unit-linked endowments may end up with less than needed to pay off their mortgages.

Andrew Verity reports on admissions by some of the country's leading insurers that they are warning policyholders about shortfalls.

Scottish Widows and Scottish Provident both admitted yesterday they had to warn policyholders that their endowments may not cover their mortgages.

Scottish Provident has already written to some customers who bought unit- linked endowments before 1985 to warn them of potential shortfalls in their endowment policies and inviting them to step up contributions. Roger Edwards, a spokesman for Scottish Provident, said: "We are formulating a strategy to deal with endowment reviews generally and what the implications are."

A spokesman for Scottish Widows, one of the leading providers, also said it had warned a number of endowment policyholders that they may need to pay more into their policies.

The embarrassing admissions follow revelations that Eagle Star was compensating customers because investment growth on their policies was poorer, and expenses were higher, than the policyholders had been led to expect.

More than half of the life assurance providers which sold unit-linked endowments have put policyholders' money in investments which have not grown enough over the past 10 years to ensure their mortgages will be paid off in full.

Robert Guy, endowment expert at mortgage brokers John Charcol, said yesterday: "I am certain other companies are likely to be writing to their policyholders with a review of some sort, either because of investment performance or because of their charges." He called on holders of unit-linked endowments to check their investments carefully.

Unless the endowment savings grow by unexpectedly high amounts before they mature, many policyholders are likely to find their endowments fail to pay off their mortgages. This could leave them to make up the shortfall at the last minute.

Figures from financial statistics specialist Micropal show that managed life funds, the vehicles used to invest the savings of most endowment holders, have failed to grow enough to meet the hopes of customers who bought unit-linked endowments before 1995. More than 90 out of 158 managed life funds have seen annual growth of less than 7 per cent over 10 years, even though they were sold on the basis that investors could expect up to 10.5 per cent growth.

Across the sector, the average annual growth over 10 years has been just 6.58 per cent.

According to Micropal, Commercial Union saw annual growth of just 5.79 per cent over the past 10 years. For Scottish Provident, the figure was 6.23 per cent.

In the competitive housing market between 1987 and 1995, several of the leading providers of endowments were able to offer customers low premiums for their endowments because they assumed optimistic growth rates.

Because life companies were forced by the then regulator, Lautro, to use growth rates of at least 7 per cent, even the most cautious policyholders could have paid too little into their endowment to cover their mortgage.