Standard Life owns up to big shortfall

Standard Life yesterday revealed that at least 75% of its 1.4m mortgage endowment policies were facing some kind of shortfall.

Its disclosure came as insurers and investment companies digested a new report on investment growth from the financial services authority which suggested that thousands more homeowners relying on endowments were likely to be warned that the policies were unlikely to produce the cash they needed.

The FSA has written to life insurers because of its concern that companies that transferred investments from shares to less risky assets such as bonds following the stock market falls may be overstating possible returns to investors.

The regulator currently requires projections on mortgage endowments to be made using three standard rates of return - 4%, 6% and 8% - but this assumes that about 70% of the with-profits fund is invested in shares and property. The FSA said companies that had reduced the amounts invested in shares would need to use lower rates - which would mean more people receiving warning letters, and some of those who have already had letters being told that the situation relating to them has worsened.

Britain's biggest insurer, Norwich Union, which has 1.3m endowment policies, said its immediate response was that policyholders "should not panic over this". It said its main with-profits funds still had a reasonably high equities content.

Standard Life likewise said it had no plans to alter the projection rates it used - sticking with 4%, 6% and 8%.

But the company has just written to most of its endowment holders to tell them where they stand, and revealed that more than 1m of its mortgage endowments are currently "facing some kind of shortfall".

They fall into either the "red" or "amber" danger zones where there is a high or a significant risk that policies will not grow sufficiently to pay off the mortgage. It is urging people to take advice.

Standard Life said it had a heavier exposure to equities than many of its rivals. At the end of March 69% of its with-profits fund was in equities and property.