Endowment Shortfalls Set To Soar

By Cliff D'Arcy | 23 June 2003

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Recently, Norwich Union confirmed that over a third of its 52,000 endowment policies maturing this year would leave their owners with shortfalls. What's more, at Standard Life, Europe's largest mutual life assurer, over one million policyholders face an average shortfall of around £4,000. However, things are set to get worse, thanks to life assurers being big sellers of shares in recent years.

The Financial Services Authority (FSA), the regulator of UK financial services, has warned life assurers to use lower rates of return when calculating payouts on mortgage endowments. This is likely to mean a big increase in the number of plans that are projected to fall short of their targets.

The FSA has recommended this course of action because some life assurers are being too optimistic about future returns, given that many funds have changed their asset mix by reducing the proportion of shares they hold. The three-year bear market in shares has means that most with-profits funds have reduced their average equity holding from over 50% to just 30% of total assets. As shares produce better long-term returns than bonds, property or cash, this cutback is likely to hit maturity values for savings plans.

The FSA is worried that if projected returns remain as they are, many endowment holders will assume their policies are on track and thus underestimate the extent of their deficits. At present, around 6.5 million of the UK's 11 million endowments are likely to fall short, but this figure is based on predicted annual returns as high as 8%. If actual returns keep coming up short, the number of failing endowments is likely to rocket.

So, what can you do to deal with dwindling returns from your mortgage savings plan? Why not act on the advice in the articles below, or ask questions on our Endowments and Life Assurance discussion board? Better to act now while you've still got time to tackle the problem than to close your eyes and hope it all goes away...

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