WHY are my endowments underperforming?

SnowMan

bigadaj wrote: »

The selling of endowments was always questionable and purely relied upon a gamble on stock market returns that paid off in the seventies and eighties but has failed spectacularly more recently.

As an engineer I can respond a bit more objectively than the IFAs posting here, but I could never work out why anyone would risk their home on the possibility of a lump sum at the end of the policy.

One of the main reasons that policies have fallen short is the high charges all the way through the system from IFAs through brokers to the insurance companies and banks.

At the end of the day the so called professionals are just taking a punt with other people's money, if it comes off, normally by luck in a rising Market, then the high charges look fine, if not then we go all the way back to mis-selling, compensation, firms going bust at not having to make payouts and the individuals keeping their over inflated bonuses for mis selling the original products.

Yes spot on there.

It is our old enemy commission bias at work again. So it does need an objective viewpoint to be able to comment. With an opaque product like a with-profit endowment it was very easy to hide charges.

For the commission based salespeople of endowments the choice was between offering the commission paying endowment and the non-commission paying repayment mortgage. So it is not surprising that most people were pushed into endowments. Of course the endowment was often cheaper in terms of initail monthly outlay (albeit that just meant less chance of repaying the mortgage at the end of the term) but the commission bias was a major if not the major factor.

For argument let's accept there is an underlying expected extra return for the risk of investing in equities rather than savings. However as soon as the level of charges negate that expected extra return it reverts to a position of the adviser getting the reward (i.e. commission) and the client taking the risk.

To me the endowment is a good example of this. The high charges meant that endowments (which contained a large level of equity investment) were a case of the risk being taken by the client and the reward taken through commission by the adviser. As the repayment alternative was effectively saving (at the mortage interest rate) it is a direct comparison between investing in high equity content endowments or savings.

This excellent article from Paul Lewis (the relevant stuff is half way down the article) explains the concept of charges bringing down the expected returns on equities to the same expected returns as on savings (by looking at the Barclays Equity gilt study) through looking at the numbers. So the client takes the risk and the adviser gets the commission.

During the periods of exceptional returns over the 70s and 80s then nobody noticed what was happening. But when stock markets subsequently did badly in recent decades the risk that the client was taking and the horrible mis-match of assets and liabilities that endowments represent became all too apparent.

There is of course an effect from a lower interest rate environment in recent years meaning that some of the shortfalls coming through on endowments has been offset by lower interest payments on the mortgage.

But there is also a major factor of high commissions and charges and mis-matching risks in endowments that are causing the current shortfalls.

macca789456

dunstonh you are missing my point it is a low figure and it has not beaten a cash return 1.5% to 2.8% over 25 years is a very poor return if i had invvested my premiums i would have had more .Commision is a big problem with these policies i paid 70% of premiums in first year in commision and i am still paying an annual commision to the so called financial adviser out of this policy to many fingers in the pie springs to mind with these things, that is the problem. 1987 was when i took out this policy the economy has only recently hit the buffers terminal bonuses where 130% now they are at best 30%. where do you get annual bonuses are always lower with a guaranteed sum from. 130% terminal bonus about 10 years ago of policy return is not low. your point about pressures put on solvency is not totally true they are a recent problem equitable lifes problems are very recent in the scale of a 25 year plan. I take from your comments that you must be quite young and not had the years of experience to base your points on.Also these policies at the time where pushed onto people by the mortgage lenders 80% of all mortgaegs were endowment backed and big commisions where had by all parties involved.Holly hobby i must correct you also i am not in receipt of any return it is the money i have paid in plus a very small amount of bonus, i am only going to be in receipt of a very large loss due to the incompetence of the handling of funds and the pre mentioned comments on commision etc. I could honestly say i could have done better myself,

opinions4u

1.5% to 2.8% over 25 years is a very poor return

Is this the return? Or is it the bonus rate on the sum assured / previously accrued bonus?

Two very different things.

I could honestly say i could have done better myself

Maybe you could. But how well would you have done in the period between 2000 and 2011 where th FTSE100 (to use just one index) has dropped in value by over 20%?

macca789456

Those are the figures of bonus added each year the first figure applies to theamount of benefit and the second figure to the existing declared bonus these figures have alwys been under 50%of premiums paid each year even in years of high returns for the company,always, between 1.5 and 2.8. The actual return has yet to be declared but it looks like being well short of the target amount. ABOUT 70% OF IT

holly_hobby

As stated previously, your premium is a gross sum, which takes account of provision for policy costings, with the balance "invested" in the with profits fund of the provider.

The performance of the WP fund, is not to be confused with the delcared operating profit of the provider.

It has already been explained how the rate of any delcared reversionary bonus is calcluated each yr, and that the addition of such is not guranteed (although generally anticipated, and the providers will stive to declare some return rather than none - which is where provision for smoothing comes into play).

The factors underpinning the return on the a WP policy has been discussed at length - and remains unchanged.

The only suggestion I can say is that, it is unlikely that returns in the short term are going to be anything too fabulous due to the prevailing factors ( i.e 1.25% was a 2011 reversionary bonus recently declared by a provider), and if you believe you can exceed the returns being achieved, you may wish to consider ceasing premiums and re-investing the policy value into another suitable medium.

Hope this helps

Holly

dunstonh

dunstonh you are missing my point it is a low figure and it has not beaten a cash return 1.5% to 2.8% over 25 years is a very poor return

You are focusing only on one thing. You also have the guaranteed sum assured to which they are added (which is typically 1/4 to 1/3rd of the amount of the target) and the final bonus. You need to look at all three things together.

Commision is a big problem with these policies i paid 70% of premiums in first year in commision and i am still paying an annual commision to the so called financial adviser out of this policy

Policies of that era were expensive in the early years. It was all front loaded back then. Ironically, there is move back to that as the FSA has, correctly, changed the rules on that front after making mono-charge flavour of the month a decade ago. However, back to the endowment, typically they were cheaper ongoing. Typically at some point after the early years the charge would come down.

The adviser that sold the policy is highly unlikely to be still receiving commission. However, a minority of cases do and the amount is typically a few pence.

the economy has only recently hit the buffers

The FTSE100 is lower than it was over a decade ago. You are mixing up issues. Economy does not equal investment returns.

your point about pressures put on solvency is not totally true they are a recent problem equitable lifes problems are very recent in the scale of a 25 year plan.

It is true. Equitable life's problems were a decade ago. Following the Asian Crisis and dot.com crash many insurers fell short of capital adequacy and some were actually breached the then requirements. This led to a significant increase in insurance companies closing to new business (the first action to scale down requirements) or sell their life book to get rid of the liability (the final sign of giving up). The requirements were increased and most with profit funds stopped investing with bonus payments as the primary objective and replaced it with remaining solvent as the primary requirement.

I take from your comments that you must be quite young and not had the years of experience to base your points on.

I started in the 80s and have plenty of experience.

Also these policies at the time where pushed onto people by the mortgage lenders 80% of all mortgaegs were endowment backed and big commisions where had by all parties involved.

Yes they way. However, that isnt the reason they failed.

I could honestly say i could have done better myself,

I doubt it given that you think until the recent recession that the bulk of the last few decades have all been growth on the markets.

macca789456

dunstonh you should go back to school the ftse 100 is not lower now than it was a decade ago.And yes the so called financial adviser is still getting commision now it does not matter how much if you multiply it by several thousand clients.Also i did not say that the bulk of the last few decades have all been growth simply that there have been a lot of very good years of profit for these companies who sold these products but have not passed on the bonuses appropriatly.If as you say you started in the eighties you dont seem to have a good grasp of economics of that era and also you talk as if it has always been as bad as it is now that is why i think you are one of the inexperienced newbies

opinions4u

macca789456 wrote: »

dunstonh you should go back to school the ftse 100 is not lower now than it was a decade ago.

Take a look at the chart in the link below and then tell me if the FTSE is currently around 5,500 and was nudging/over 7,000 a decade or so ago.

http://www.moneyweek.com/news-and-charts/market-data/ftse

For most of the period from 1998 to 2001 it was higher than it is this morning.

And yes the so called financial adviser is still getting commision now it does not matter how much if you multiply it by several thousand clients.Also i did not say that the bulk of the last few decades have all been growth simply that there have been a lot of very good years of profit for these companies who sold these products but have not passed on the bonuses appropriatly.If as you say you started in the eighties you dont seem to have a good grasp of economics of that era and also you talk as if it has always been as bad as it is now that is why i think you are one of the inexperienced newbies

But your misinformed comment above confirms that you're talking cobblers, so why get personal with somebody who has done nothing more than provide factual informaton for you?

angela110660

We have a very underperforming endowment dating from 1993 which we are still retaining for life cover and it will mature about the time our youngest heads off to uni so any money will no doubt go towards that. Mortgage shortfall has been sorted out gradually over time - originally guesstimated to get £62K and now forecasted £26K according to last statement but there you go.

Having recouped only our premiums by the maturity we also worry about the vehicle used for our private pension plans. It is suggested to pay in more and more but we don't want to be struggling to make these payments now for not much at the end. Should our spare money go into ISAs rather than pension pots?

dunstonh

dunstonh you should go back to school the ftse 100 is not lower now than it was a decade ago.

Thank you for continuing to confirm you unqualified and inaccurate opinion.

And yes the so called financial adviser is still getting commision now it does not matter how much if you multiply it by several thousand clients

So, despite most of that era no longer working for the biggest distributors as they have shut down, you still think they are paid commission?

Also i did not say that the bulk of the last few decades have all been growth simply that there have been a lot of very good years of profit for these companies who sold these products but have not passed on the bonuses appropriatly.

Holly has explained it to you a number of times now but you seem intent on ignoring it. The bonus rates are not based on the profitability of the company but the underlying assets of the fund. However, financial solvency of the company does create a drag on the bonus rates as they are required to be able to fund all policyholders. With some companies it creates a significant drag.

If as you say you started in the eighties you dont seem to have a good grasp of economics of that era and also you talk as if it has always been as bad as it is now that is why i think you are one of the inexperienced newbies

Coming from the person that thinks the FTSE is higher and that bonuses are based on the profit of the insurer and that policies are still paying renewals to salesforces that are long gone (ignoring the fact that most salesforces actually paid indemnity commission and not level commission).

I was willing to give you the benefit of the doubt, as have the others that have replaied, but clearly you are don't want to know or understand but remain as ignorant as a 13 year old. Perhaps your intention was to join up and troll. Either way, it pointless discussing anything with you.