The dark secrets of mortgage endowments

I was convinced the industry was hiding a dark secret. Why were so many insurers refusing to publish how much they were paying? Was it possible the outcomes for investors were not as rosy as they claimed?

If so, what would be the consequences for the millions who had been flogged them as the ideal way to repay a mortgage and provide a tasty lump sum on top?

Borrowers who were duped by the slick-tongued promises are in many cases receiving a quarter of the payout they might have expected

At that time I was attacked by the industry and, along with others who took the same stance, I was subjected to foul-mouthed rants and threats from some financial salesmen.

The chief regulator mocked us at a mortgage industry lunch, likening the scandal to having a burglar break into your home and leave a bag of money.

Well the chickens have come home to roost. Borrowers who were duped by the slick-tongued promises are in many cases receiving a quarter of the payout they might have expected.

Money Mail has published shocking figures showing how payouts have collapsed. Standard Life, once the endowment flag-bearer, would have paid £110,399 on a benchmark 25-year, £50-a-month endowment in 1992. Today it will pay £23,814 – that is 78.4 per cent less.

General Accident, another regularly at the top of the tables, paid £110,093 in 1992. Now it pays £27,670.

What is worse, insurers have fallen back on their old habits of refusing to publish how much they are paying. And, scandalously, many are refusing to say how many investors are facing a shortfall because under the new Solvency II rules they do not have to. Once again the regulator appears to have fallen asleep on the job.

Where has the money gone?

We might be in a low interest rate environment, but endowments were supposed to smooth returns over 25 years.

The stock market is trading close to record highs. There might have been a couple of corrections in that period, but dividend income has remained solid. Property and bonds returns have been decent.

It seems that those who were advised to stick with their endowment were often just being encouraged to throw good money after bad. Dreadful management, poor investment decisions and high charges have made a mockery of their 25 years of investing.

Once tax incentives were removed in 1984, these investments should never have been linked to mortgage loans. Greed among insurers and their lackey salesmen was the motive.

Twenty-five years on their victims, let down by the regulator, are still paying the price.

Regulator gets tough

The Pensions Regulator has been flexing its muscles issuing more penalty notices to employers who failed to meet their auto-enrolment duties.

The 753 employers who are not paying contributions represent less than 0.1 per cent of the total. We can hope some of this is ignorance rather than wilful disobedience.

This is happening in a buoyant, expanding, economy. What happens if things begin to go pear-shaped? What if rising interest rates and slower growth put the squeeze on businesses?

Once marketing, IT and human resources have taken their traditional clobbering, what comes next?

Skipping employee pension contributions is bound to look like an attractive option to businesses in trouble – just ask anyone employed by BHS.

There are more than 800,000 compliant employers with more than 8.7m workers in workplace pension schemes.

That is an achievement when you look back a few years to the deteriorating situation before auto-enrolment. Equally, it means the regulator will have a massive job keeping on top of it all.

RPI rip-offs

As I have mentioned, the latest inflation figures show the retail price index (RPI) running 4 per cent while the consumer price index (CPI) is at 3 per cent.

Among those who take advantage of this are mobile phone companies that raise fixed contract prices by RPI each year. But I suspect sectors of the financial industry are also benefiting. Numerous old insurance savings contracts had monthly policy fees that rose with RPI each year. 

What I do not know – and I suspect neither do most people – is how many of these are still in force. Most importantly I suspect that the investors who hold these policies are equally unaware of how much is being leeched from their savings.

Many were sold before 1996 when CPI was just a twinkle in the chancellor’s eye. Despite modernisation by some insurers, I would be amazed if these RPI-linked fees are not still lurking, taking increasing bites from savers’ money.

Tony Hazell writes for the Daily Mail's Money Mail section