Outlook: Endowments fiasco just the flip side of low interest rates

Betting on IPOs; Pension fiddling

The endowment crisis is growing worse by the day and, for some providers, it may yet end up as costly as the pensions mis-selling fiasco. Endowment mortgages ceased to be a bankable proposition for most home owners the moment Nigel Lawson removed tax relief on life assurance back in 1984. Prior to that, they were actually quite a good way of borrowing to buy a house. The tax relief allowed life assurers to guarantee a sum assured that would always repay the outstanding loan. Bonuses were just cream on top.

The endowment crisis is growing worse by the day and, for some providers, it may yet end up as costly as the pensions mis-selling fiasco. Endowment mortgages ceased to be a bankable proposition for most home owners the moment Nigel Lawson removed tax relief on life assurance back in 1984. Prior to that, they were actually quite a good way of borrowing to buy a house. The tax relief allowed life assurers to guarantee a sum assured that would always repay the outstanding loan. Bonuses were just cream on top.

Once the relief had gone, however, the salesmen were more and more forced into lowering the sum assured so as to keep premiums at competitive rates, leaving the endowment increasingly reliant on bonuses to achieve the required end result. This was OK as long as stock market returns and interest rates remained high, but in recent years it has come unstuck. The Association of British Insurers yesterday admitted that a further 10.2 million letters were being sent to endowment mortgage holders. Perhaps as many as 60 per cent of these letters will be amber or red in nature, suggesting either that the endowment holder consider a top up or actively encouraging him to do so.

It scarcely needs saying that anyone prepared to rely wholly on volatile stock market investment to repay a bank loan at a fixed point in time needs their head examined, but that didn't stop the salesmen selling these things in huge quantities throughout the 1980s and well into the 1990s. What's more, the ABI makes an entirely valid point in insisting that lower capital returns from endowment policies are just the flip side of the low interest rate story, from which most home owners have benefited in terms of the rising value of their properties and lower borrowing costs.

Factor in the falling cost of interest payments and, even taking account of any necessary top up, many endowment mortgage owners are still better off than they could have assumed when they took out the policy. It's hard to feel sorry for those facing a small short fall on their endowments when the value of their property may have doubled in five years. Even so, in many cases endowment policies were sold under false pretences for the specific purpose of generating commissions.

The Financial Services Authority is prepared to back claims for compensation, but only where the borrower has proof that they were misled. This may be a larger group than assumed, and it could be that where proof is found against one particular salesman, the provider will feel obliged to pay up on all endowments sold by him. In any case, if the stock market continues to slide, and more amber letters turn to red, it could end up very costly indeed.

Betting on IPOs

Betting is the new internet, or so the sponsors of the William Hill share flotation, which was formally confirmed yesterday, would have you believe. It is perhaps just coincidence that the IPO is to take place slap bang in the middle of the World Cup, which according to some bookies could generate £250m in betting revenues for the UK industry alone, but it certainly adds a sunny disposition to a business which already seems to be enjoying more than its fair share of luck. Long gone is the industry's squalid old image of decline – smoke-filled afternoons for out-of-work navvies – and in its place is a business alive with change, growth and opportunity. Deregulation, a change in the way betting is taxed, the consumer boom, interactive digital TV and the internet have all come together to make bookmaking supposedly one of the hottest investment properties in town.

Well, maybe. Over the years William Hill has had so many different owners that it's hard to keep count. They've included Allen Sheppard of Grand Metropolitan, George Walker of Brent Walker and Guy Hands of Nomura. The present owners, the venture capital firms Cinven and CMV, have wanted to sell for ages but somehow or other, the market has never looked right. Even now it may be a struggle. William Hill joins a long line of companies planning to float over the summer. After months in which it has been impossible to do virtually any IPO of size, there is a veritable army of them struggling for attention and space. Most of them have some kind of an interest in the only part of the economy doing well, consumer spending, so there is large element of opportunism to the floats.

Even so, the lacklustre reception given last week to HMV, the music retailer, doesn't bode well. As a pathfinder for all the other floats in waiting, HMV has been a bit of a spoiler. Investors have yet to recover from the beating they took as a result of the technology and telecommunications boom. Of the myriad IPOs that have taken place over the past four years it is hard to think of any other than easyJet which is above water. Most of them are so far under that many smaller investors will take a lot of convincing before ever touching an IPO again.

The present batch of flotations is quite different from the vacuous assembly of technology, telecommunications and dot.com IPOs that characterised the bubble, and that plainly makes a difference. Not all of them have much of a track record. But at least they are all "real" businesses, with established revenue streams. Then again, the once burgeoning army of retail investors that did so much to make things go with a bang has now almost wholly dissipated. William Hill, Punch and John Wood Group are all no doubt fine businesses, but they lack the glamour and promise of instant profits that so excited interest around the techs.

What's more, there is an understandable believe in the minds of many investors which is hard to disperse that, after the scandal of the dot.com boom, all IPOs are essentially a rip-off. Punch has perhaps wisely chosen to exclude retail investors altogether from its IPO later this week, making it an institutional only offer. Even so, scepticism remains the order of the day. By the time these businesses are floated, the venture capitalists have generally had the best of any upside. The practice, now common place among some investment banks, of buying the deal by making fees dependent on achieving a guaranteed minimum price for vendors adds to the impression that IPOs continue to be more about milking investors than providing them with a good home for their money. Some of these floats will prove to be perfectly fine, but the sponsors have a mountain of scepticism to climb.

Pension fiddling

Oh no. Not another Government sponsored review of the pensions industry. Ian McCartney, the pensions minister, yesterday announced he was appointing Brian Davis, former head of the Nationwide building society, to review the pensions regulator, the Occupational Pensions Regulatory Authority. Mr Davis is described as having the sort of meticulous qualities necessary to undertake such an exercise, which is perhaps just as well. For anyone else it would be like losing the will to live. Apparently someone has to do it, because statute dictates that Opra must be reviewed every five years, but coming on top of at least five other government-sponsored reviews with a bearing on the future of the pensions industry, it's hard to know what good it can do. While the Government fiddles, the industry burns. Mr McCartney should stop ordering reviews and get a grip before it's too late.

jeremy.warner@independent.co.uk