Why are some endowments so much worse than others?

Crazy_Saver

Hi everyone.

I read these boards all the time, and I am aghast at the way different policies perform!

As most of you are already aware, my policy is currently showing a £31k shortfall whereas others are showing surpluses!

I understand that they are all with different companies but are these companies not monitored in any way by some form of regulating body as to how they invest their "clients" money.

Are some banks or insurance companies always more likely to invest our money in the best way and others always in a way less likely to give an acceptable return?

I may be naive, but I'm sure that if Sainsbury or Tesco were failing their customers to this extent someone somewhere would demand that something be done straight away.

When these badly performing policies started to drop drastically, why didn't the companies re-invest in the same way as the better policies had already done, to try and recoup some of the shortfall?

I suppose what I am asking is " who is out there to help ordinary customers like myself to choose a bank, building society or insurance company etc.. that will invest our money wisely?"

Are financial advisors made aware which companies are high risk and which ones are not, or are we all in need of a crystal ball?

trademark

different fund managers have a different view to risk . Look at the football league table , why are man utd better than lincoln , more money to throw at problems a more skillfull team , i could go on and on .

i had a 20k shortfall with scottish amicable , now the prudential group , i paid and still do £142.90 per month .

in 2002 i requested information on the funds exposure to equity (stocks) it was still 40% and is now much more , my father did the same with sun life , it was 5% .

the ftse was 3000 and something then , its now doubled , my >40% exposure has helped my policy no end (shortfall is now just a few hundred pounds), my father cashed his as i would have done in his situation

what im trying to say to you is that even though your policy is managed you should still ask questions , it was or should have been obvious that the markets would rise at some point in the early 2000's, and if your company has all but pulled out of stocks you will have no chance of a recovery so best to pull out and go somewhere else .

the situation now is more difficult , i still feel the ftse has 2000 - 4000 more points in it , maybe more , at the same time is your fund invested in property , i disagree with most in thinking we are in for a fall in that department .

in answer to your question though , "who is out there to help" im afraid that person is you , there was not a financial adviser in england who would not have recommended an exposure to tech stocks in 99-2000 , 12 months later you would be sitting on a 50-90% loss .

go with your gut feeling and dont be afraid to be the odd one out .

Crazy_Saver

thanks trademark.

I think I understand some of what you say, but when you talk about FTSE and exposure to stocks I'm completely lost.

You say that I should ask questions, but will my questioning make any difference to my policy? Do I have any say in how they invest my money?

I am with Zurich with 10 years left on a 25 year policy.

wymondham

crazy saver, I too had a Zurich policy - 25 years with 10 years to go .. decided to cash it in as the premiums were creeping up made it poor value....
it must have been a bad one as nobody would buy it!

The tipping point with us was we worked out we would get more return by just putting in a savings account!

ps: we were successful with our claim so hope you are also.

EdInvestor

The difference in performance of endowments is quite complicated to explain.Most companies had a substantial exposure to equities in their With profits funds (75%+) at the time of the market fall.

The Pru/ScotAmicable was one of the few exceptions - investment managers there had gradually moved money into bonds, feeling the market was overvalued from around 1999 on.So it was quite well protected. But most companies (and advisors) were totally gung ho and thus their WP funds made big losses.(The same thing happened to company pension funds for the same reason).

At the extreme was Standard Life, where managment was arrogant enough to think it knew better than the market.It lost 80% of the capital in the WP fund before the FSA forced it to move into bonds to back its guaranteed liabilities ( eg your guaranteed sum assured).THen it had to demutualise to raise new capital to replace what it lost.

The FSA then made everyone back its guarantees with bonds ( formerly the regulators were very lax), and that's why many companies now have less than 40% of the money in equities.The policies are safer - the guarantees will be met - but they won't perform beyond that, so there are large shortfalls.

High charges are another contributing factor.So are overblown projections at the point of sale: many policies only had a chance of meeting targets if the market boomed forever. A further problem that hits endowment policyholders is that many companies have big guarantees on their pension policies - so the WP fund is forced to take from thoise without the guarantees to pay those who do. Then there is the lower returns expected in the furture due to lower interest rates and inflation.

The whole thing has exposed big holes in the "With profits" concept which has now been largely discredited.

But at root is a problem of poor regulation, particularly with Equitable Life, the worst aspect of the affair.But of course the politicians (both sides) refuse to admit they have any responsibility at all.Don't assume any regulator is looking out for your interests: they weren't then and they aren't now.

Buyer beware.

ReportInvestor

Crazy_Saver wrote:

Are financial advisors made aware which companies are high risk and which ones are not, or are we all in need of a crystal ball?

Some might have been aware of the free asset ratio (a key figure when things unravelled), others might have paid more attention to the commission rates.

Nowadays they are far less likely to recommend with profits - search through dunstonh's past posts for confirmation.

Crazy_Saver wrote:

I may be naive, but I'm sure that if Sainsbury or Tesco were failing their customers to this extent someone somewhere would demand that something be done straight away.

Not really. We'd just go and shop elsewhere. The analogy doesn't work because we have no long term investment in Sainsbury or Tesco.

The FSA has two, potentially contradictory roles, here. One is to protect consumers and the other is to maintain confidence in the financial system. In pursuit of the second, they sometimes neglect the first.

A recent example is when an Investors' Association member pursued the FSA using the Freedom of Infomation Act to require the FSA and the closed with profits funds to disclose their performance figures (so that investors could form a judgement).

The FSA initially dragged its feet. I assume that this may have been because they did not want a run on the weakest funds - possibly leaving some customers in even more dire straits?

Crazy_Saver wrote:

I suppose what I am asking is " who is out there to help ordinary customers like myself to choose a bank, building society or insurance company etc.. that will invest our money wisely?"

I don't think you want, or are suggesting, a "nanny state" solution.

We have to take responsibility for our own actions, and mustn't assume we should be baled out or qualify for compensation if we don't make the right choice.

Caveat Emptor used to be the watchword. Do your own research etc. etc.

There are some useful websites - e.g. The Motley Fool or Interactive Investor. In addition IFAs would claim that they can act as an impartial and experienced guide.

Crazy_Saver

originally posted by wymondham
crazy saver, I too had a Zurich policy - 25 years with 10 years to go .. decided to cash it in as the premiums were creeping up made it poor value....
it must have been a bad one as nobody would buy it!

Same Here!

I have contacted a few companies which have been recommended by people on this site but so far none of them want to buy my policy.

I suppose I will have to surrender and then re-invest. Thinking of investing in ISA's and NSI index linked savings certificates.

Crazy_Saver

originally posted by ReportInvestor
I don't think you want, or are suggesting, a "nanny state" solution.

You are right in assuming that I do not want a "nanny state", but I do feel that if a client is using an IFA then they should feel secure in the knowledge that the advisor is working in their best interest. When myself and my husband took out our endowment we were young, naive and trusting.

Originally poted by ReportInvestor
We have to take responsibility for our own actions, and mustn't assume we should be baled out or qualify for compensation if we don't make the right choice.

Caveat Emptor used to be the watchword. Do your own research etc. etc.

I must admit that I do as much independent research as I can now that I am older and wiser, but what is the role of the IFA if not to do the research on your behalf?

dunstonh

Im copy and pasting below what I commented on another thread. Its sort of related to this thread. I am not altering the content as it would take too long but it may help you understand the issues here along with Eds post higher up.

You have to understand that these projections are just examples. They are no indication of how your investment is performing.

Here is an example: A 1997 unit linked endowment invested in a UK stockmarket fund set up to need an average return of 7% p.a. to hit target.

First flaw is that on day 1 that endowment is on for an amber warning as the projections use 4,6 & 8%. 4 and 6% would show a shortfall. 8% would show a small surplus. That remains the case potentially right up until maturity if it was to achieve exactly 7% it would hit target but each and every year would be an amber.

Now, lets look at flaw number 2. We had a stockmarket crash in 2002. So, early performance would be below 7% and that would push the endowment into red. However, that isnt a bad thing. Its a good thing. A stockmarket crash early into the term is exactly what you want. All those units you are buying are cheap after a crash and when the recovery happens they are the ones that make the most money. So, you are now getting red warnings in the period of the crash and just after giving you the impression things are bad but actually they are not. Its exactly what you want in the near the beginning.

Lets look at a real example and pick the Standard Life managed fund and look at the annual performance year by year going backwards from 2006

11.09%
18.75%
10.80%
12.24%
-12.44% (stockmarket crash years)
-13.85%
9.98%
14.94%
-1.01%
15.94%

So, you can see it fluctuates a lot.

Now, we move to flaw number 3, which is linked with flaw 2. If you look at that 1997 example again you will see in year one the value would have dropped 1.01% over the first year (ignoring contributions for the moment). So a projection after one year at 4, 6 & 8% would show all red as it got minus 1.01%. but look at the next two years. Well above what was needed. Now comes the problem. two years of negative returns due to a long stockmarket crash. Not a problem as mentioned in flaw 2. However, because everyone thinks short term the endowment problems start. Virtually all endowments at that point would be below track. But look at the four years that followed. Those that surrendered missed out on the recovery and those bad years where the unit price dropped big time would have allowed them to buy new units much cheaper than before. As the price recovered, those units would have made up for the drop before.

For reference, that Standard Life managed fund has achieved an average of 7.84% p.a. over the last 20 years. An endowment needing 7% p.a. in that period would have paid a surplus. But they would have got amber letters right up until maturity.

Flaw 4 relates to old conventional with profits plans. These products were designed in an era where endowments had never failed and when you invested in with profits, you got 3 to 4 times your money in 10 year periods (hence why some people mention that they were shown figures with 3 to 4 times mentioned). They were before home computers and consumer awareness. These conventional with profits plans were never designed to have a daily value. Many companies have been unable to give them a daily value because the computer software these policies are held on cannot be updated. So, when asked to give projections, the only figure they have to project from is the surrender value. This is often many thousands of pounds lower than the real position. So, projections on these are projecting from a lower point than they should. This has been seen in past even on these forums where people quoted 4, 6 & 8% but the 4% projection figure was lower than the guaranteed minimum maturity value. When this became known in the industry a number of providers made the 4% figure the guaranteed minimum maturity value or 4% whatever was higher.

Flaw 5 is linked to 4 in that with some conventional with profit projections, they do not include the terminal bonus that may be accrued on the plan.

You are right in assuming that I do not want a "nanny state", but I do feel that if a client is using an IFA then they should feel secure in the knowledge that the advisor is working in their best interest. When myself and my husband took out our endowment we were young, naive and trusting.

Most endowments were not sold by IFAs. They were sold by tied agents. They were also mostly sold in an era when the data really wasnt available to anyone to see the problems. We can look at it in hindsight with the information available today but no-one had a clue what was happening back then. Remember that even the Consumers Association were recommending endowments as best buy. The move from a boom/bust, high inflation economy to a steady low inflation economy caught everyone out. Endowments were designed and priced for the former and not the latter. Then you had the big stockmarket crash just after that and Gordon Brown decided to raid pension funds and hit the stockmarket harder. The FSA increased the solvency requirements and revised accountancy methods have occured.

If the old economy had continued, your endowment and everyone elses would have paid big surpluses but we would all be worse off financially as interest rates would be higher. So mortgage payments would be higher. Property would be cheaper but savings acccounts would be paying rates below inflation and charges on products today would still be higher as they would have to factor in higher inflation.

I must admit that I do as much independent research as I can now that I am older and wiser, but what is the role of the IFA if not to do the research on your behalf?

An IFA that doesnt pay for research software etc isnt much use to you. Those that pay for the research data can get information that you will not have available to you.

I think the issues here to consider are:
1 - most mis-sales are done by tied advisers and not IFAs
2 - over 80% of IFAs in business today have never had a complaint. Most of those that caused problems have been weeded out.
3 - most people seeing tied agents dont realise it and think the adviser is independent.
4 - dont assume all IFAs are the same. The term covers a people with differing skills, ability and attitude. No point seeing an IFA that deals mostly in mortgages when you want to discuss investments.

EdInvestor

dunstonh wrote:

We can look at it in hindsight with the information available today but no-one had a clue what was happening back then.

You are not wrong.

It was striking that when John Tiner (a very senior financial professional with a top chartered accountant background ) took over the FSA, he was moved to immediately launch an inquiry into the With profits industry in the wake of the Equitable Life crash. As you can imagine, he felt he ought to understand what this was all about.It took almost 3 years before enough information had been gathered and analysed and the FSA felt comfortable to issue new regulations to straighten it out. Three years.

Yet millions of people were investing in these products right through the 90s, whether endowments, pension or WP bonds. It's just astonishing that so many people could be exposed to a product that is so complex that even senior financial professionals cannot understand it.

Talk about smoke and mirrors.

ReportInvestor

Given some of the guarantees on these funds handed out like candy to some lucky investors, but not to the mugs, it needed forensic accountants, actuaries and financial analysts to get to grips with the implications for individual funds going forward.

Some funds were starting to resemble Ponzi schemes where new business was needed to pay for these unwise past guarantees. But as performance declined there was little chance of new business and so the funds had to be made closed.

Leaving the last batch of mugs trapped inside at the mercy of huge market value reductions if they wanted to withdraw their money.

Crazy Saver mentions being "young" and "naive". In my experience even more savvy investors can be taken in by a household "name". In another investment area, my father in law, unknown to me, foolishly invested in a stock market bond just because he had heard of GE Capital, but the terms & conditions required a particular performance from the indices and had nothing to do with GE.