WHY are my endowments underperforming?

sturge512

Is there anyone who can explain to me why, if for 16 years up to 2008 the economy was booming, were my endowments STILL thousands of pounds off track?

I could understand it if they had started falling behind SINCE the markets crashed but I've been receiving warnings since the turn of the century. Is this normal?

holly_hobby

The emvs used to calculate premium levels, together with how the funds (with profit or indeed unit linked) were managed by the fund managers, has the greatest bearing, along with the downturn of course.

Where there was insufficient diversification within the fund, i.e an overweighting on cautious investment for stability, against medium to adventerous for growth, compounded by poor management of the growth achieved (ie failure to effectively read the markets, moving between asset classes in line with market performance and predicitons etc), has been one of the main underlying reasons for failure (further compunded by market depression), and was certainly the root cause of RSAs very poor LCE performance.

Fund recovery further stunted due to the continuing impact of the worse economic downturn in financial history, which does little for market confidence and investment return - so the funds just aren't able to recoup the poor performance, without going all out on risk, which is not an option, hence the resulting shortfalls to targets. Together with optimistic estimated growth rates, which in many cases resulted in policy premiums that were also too low to achieve the level of investment for the target sum to be comfortably and realistically achieved.

So there will invariably be several factors affecting the overall return achieved.

It is complex .. but hope this very basic explanation of why investments such as low cost endowments, have failed to perform to target makes it a little easier to understand the issue.

If this is still used as a mge repayment vehicle, have you considered switching all or part of your mge to capital and interest to give some security of payment at redemption ?

Hope this helps

Holly

sturge512

Thanks for your reply Holly. To give you an idea of my grasp of these things, I just about got the gist of your basic explanation! So, in even more basic terms, the endowment provider's estimation of the amount my fund would provide was over optimistic. Furthermore, the "gambles" they took on stocks/shares/whatever on my behalf with my funds didn't "win" them as much as they'd hoped?

Is the stock market such a difficult thing to succeed on? So much so that highly paid professionals, with in-depth knowledge of the marketplace, struggled to provide their customers with a satisfactory return on their investment? I know it can't be as straightforward as that but if I'd underperformed by so much at my job, there'd have been hell to pay!

I took out my endowment mortgage in the early nineties and the price of my house was fairly modest. I've already taken the steps you've suggested and I'm repaying around 20% of my mortgage capital along with the interest. I'm still going to fall a bit short but it's not enough to lose sleep over, thankfully. Doesn't make me any less frustrated, sadly!

Thanks again for your response. :beer:

opinions4u

Lower interest rates than were anticipated when the products were designed and projections assumed.

Lower inflation that was anticipated when the products were designed (returns in real terms are actually ok in many cases).

In many cases, people have saved £thousands on their mortgages through lower interest rates. If they had used those savings to offset underperforning endowments (by overpaying the mortgage) then perhaps the endowment shortfalls wouldn't be causing anybody problems.

Is the stock market such a difficult thing to succeed on?

Well the FTSE100 hit 7,000 in 2000. Over a decade on, and it's around the 5,500 mark. So not easy to make decent returns in that timeframe.

holly_hobby

Well this is an industry wide problem I'm afraid - and not the problem of just one or a select number of providers.

Industry estimated growth rates used throughout the 90s. were partly based on the past performance of policies, which were bouyant (indeed pols effected in the 80s often matured with a healthy surplus to target), and no one at that time could have predicted the financial fallout to come in a decade or so, accordingly it was accepted that polices (although not guaranteed) would at least meet their target figure.

The EMVs used, set the investment contribution perceived as reqd to reach target, at the given time under the given rate. We now accept that EMVs used at the time were too generous (and didn't take account of future financial downturns etc), resulting in most cases of a basic level of investment that was simply not sufficient to achieve target based on the actual returns. (some pols allowed you to pay a higher prem to increase the potential tax free lump sum, those who chose to pay a higher premium under such policies, have obviously faired better with regards to predicted shortfall).

So with all providers the investment contribution was an issue - this is industry wide.

Now this is where the further diffirential comes between various providers and their fund management teams, resulting in variances between shortfalls on comparible policies.

And then we had the downturn.

So its not ALL the fund managers fault as discussed earlier, rather there are various complexities that have together resulted in the issues we are seeing today.

An investment can never guarantee a return, the real heartache is where such policies were used to support to repay a mortgage (often because cheaper than a repayment mge, sometimes because the potential lump sum was the carrot), further to which the individual has now been forced to make additional provision. Over the term they will have invariably paid less than if they had had a comparible capital & interest mortgage, unfortunately that saving is in essence now having to be re-sourced, to manage the problems that have now materalised with such policies.

Hope this helps

Holly

Thrugelmir

sturge512 wrote: »

Is there anyone who can explain to me why, if for 16 years up to 2008 the economy was booming,

Was it booming?

Or was it an illusion created by cheap credit and the importation of low cost product from China. Which meant that we all felt wealthier. Although as a whole we were actually less productive.

dunstonh

Is there anyone who can explain to me why, if for 16 years up to 2008 the economy was booming, were my endowments STILL thousands of pounds off track?

Can you explain where you get 16 years of booming from?

You have missed the asian crisis, the dot.com crash, American accountancy scandals to name a few.

If you pay in monthly and a crash happens in year 2, it doesnt make much of a difference at all. However if a once in a general level of crash happens in year 10 then it crucifies performance. If you then get a second "once in a generation" level crash 6 years later than it creates even more damage.

macca789456

Hi i took my 25 year endowment out in 1987 it matures next year. It is going to have at least a 30% shortfall and that is before the latest turmoil.What i dont get is for 25 years the highest bonus that has been added is 2.8% and thats when they were making big yearly profits and even now the annual statements keep saying 6% growth forecast for next year yet the bonus ends up being 1.5%. so why is that

holly_hobby

It is not the profits of the company as a whole that you participate in, that determines the amount of bonus/return achieved by your WP policy, but the performance and profit generated within the companies investment underpinning the WP fund, within which your premiums form a collective investment with other WP investors.

The value of the fund in the case of WP investment, (and following the previous explanations noted above), takes account of policies maturing that year in providing for basic sum assureds and gted reversionary bonuses based on previous yrs growth, operating provision (such as providing for other vehicles, such as pensions, participating in the fund), smoothing provision, then reporting of reversionary bonuses for live policies, with any surplus used considered for terminal bonuses on maturing policies. The fact in current financial circs that you are in receipt of a return at all is actually positive - although I know you won't appreciate it in such a way.

Unit linked polices work slightly differently as they are asset backed investments.

The % estimated growth rates quoted in forecast illustrations, are prescribed by the FSA - as you can see the actual returns being acheived by providers don't always match them for reasons already discussed.

Hope this helps

Holly

dunstonh

What i dont get is for 25 years the highest bonus that has been added is 2.8% and thats when they were making big yearly profits and even now the annual statements keep saying 6% growth forecast for next year yet the bonus ends up being 1.5%. so why is that

The annual bonus is just part of the return. You have the guaranteed sum assured to which bonuses are added and the terminal bonus.

The annual bonuses lowered significantly when solvency requirements were increased to prevent another equitable life. So, providers tended to move the returns more to the terminal bonus instead which is more flexible for them.

holly_hobby

Of course the TB is not gte'd either (in fact many providers are not releasing them on maturing policies) - in fact the only guaranteed amount payable at inception under the policy, is the GSA on death, or the BSA at maturity - of which the fund also has to of course make provision. Of course one hopes when effecting such a policy, that the provider effectively manages your investment over the term, to attract at least the addition of reversionary bonuses.

Hope this helps

Holly