Personal finance: The nasty legacy of endowments sales

This week the full cost of the biggest financial scandal in this country's history, the mis-selling of personal pensions, was finally given an official price tag: pounds 11bn. Both regulators and Government are now steely in their resolve to clean up the mess: there will be compensation.

Unfortunately, the regulators are much less strident about another nasty legacy of the late 1980s and early 1990s: the mis-selling of endowments. Evidence is piling up that hundreds of thousands of endowment holders have been led to expect much more from the policies than they will actually get.

The Institute & Faculty of Actuaries is a powerful body representing the professionals who have the job of sharing out life insurers' investment funds. This week it warned that endowments would pay out much less in the coming years than they have done.

Those who bought an endowment in 1973 are laughing. Payouts this year have reached record levels. A saver who put in pounds 50 a month (totalling pounds 15,000 savings), would see a payout close to pounds 100,000. Before tax, they have got a return worth roughly 16 per cent a year.

The future looks less rosy. Long-term interest rates have hit a nadir of 6 per cent and inflation is widely expected to stay low. Investment returns are expected to be closer to 10 than 16 per cent. That leads actuaries to anticipate a 5 per cent fall in payouts - every year. By 2006, the same 25-year policy is likely to pay just over pounds 50,000.

For some of those with an endowment mortgage, this is unpleasant news.

If you were led to believe your endowment would grow modestly - at, say, 7 per cent a year - then there is unlikely to be a problem. But some sales people were less scrupulous. Keen to sell an endowment (loadsamoney), rather than a repayment (no commission), they referred people to the double-digit returns of the 1970s and 1980s. "You can pay off the mortgage AND get a lump sum at the end," they typically said. An honest sales person would have added - "but only in the unlikely event that these dazzling returns keep up".

By assuming that policies would grow quickly, financial advisers could offer cheaper premiums to the unwitting homebuyer. But the cheaper the premiums, the riskier the policy.

A substantial minority of endowment holders - possibly over a million people - now face the danger that their endowments will not pay off their mortgages. Those most in danger are those who bought policies between 1982 and 1987, when sales people assumed high investment growth.

Scammy mortgages didn't stop with the 1980s. As our piece on page 5 shows, homebuyers are still being offered apparently cheap mortgages which sometimes have nasty catches in the small print.

What are the regulators doing about this? Nothing - there aren't any regulators. Helen Liddell, the Economic Secretary to the Treasury, is still umming and ahing about whether the new Financial Services Authority should regulate mortgages. Of course it should, and quickly please.