NU pledges ?60m to make up endowment shortfalls

Half a million homeowners with mortgage endowments that have fallen off track yesterday won a reprieve when Norwich Union promised to make up potential shortfalls.

NU, the retail arm of the CGNU group, pledged to top up final bonuses on its endowment policies provided that future investment returns average 6% a year.

The biggest beneficiaries will be the 50,000 NU endowment holders who were last year sent a "red" warning letter that their policy was at serious risk of failing to pay off a home loan. A further 450,000 of NU's 700,000 endowment holders were sent an "amber" letter warning of a potential shortfall. All policyholders will be sent a reprojection letter giving them the "green" all-clear on their endowment.

CGNU chief actuary Mike Urmston put the cost of the pledge at about 1.5% of the company's £4bn in free reserves, or no more than £60m. "It gives our customers a lot of comfort and is an example of how we can use our financial strength to the benefit of policyholders."

NU's pledge takes the number of endowments enjoying protection from shortfalls to 3m out of the total 12m in force and will put pressure on other insurers to follow suit.

Over the past year Standard Life, Liverpool Victoria and CGU (Commercial Union and General Accident policies) have all promised to make up shortfalls. Among the biggest providers which have rejected endowment promises are Legal & General, Scottish Amicable and Friends Provident. An L&G spokesman said: "What they are doing is giving promises, not guarantees. Endowments were not designed to contain guarantees and offering them could prejudice other customers' interests."

The NU pledge comes despite its worst years for investment returns since 1994. Yesterday it said that its £80bn with-profits fund had made re turns "close to zero" in 2000, compared with a gain of 17% in 1999. Big falls in equities were partly offset by NU's traditionally heavy investment in property, and Mr Urmston said the insurer, Britain's biggest, will increase property investment this year.

But the fall in investment returns has forced NU to cut payouts on a wide range of policies. A 25-year £50-per-month NU endowment this year will pay out £86,028, a fall of 4% on last year's £89,518, but representing a return over the period of 12.1% a year or 7.4% after inflation.

Axa's 660,000 policyholders recently shared in a £400 per head one-off payout from the company's orphan assets, but yesterday CGNU ruled out a similar distribution to its 2m-plus policyholders in the near future. Mr Urmston said: "We are very conscious of the Axa case and are examining it in detail, but in principle we intend to use the fund to support the growth of new business rather than make payouts."