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Good news and bad for people with endowment mortgages: if we are to believe the Association of British Insurers (ABI), the number of people facing a shortfall on their mortgage is on the way down. But the more pessimistic John Tiner, chief executive of the Financial Services Authority (FSA), believes the number of shortfall warnings will go up, from 50 to 70 per cent. So who is right?
Although the FSA concedes that Tiner's figure is a 'guesstimate', it's not too far off industry figures, which suggest that 'up to 75 per cent of policies may face a projected shortfall'. But if - as the ABI does - you strip out endowment holders who are no longer relying on policy proceeds to pay off their mortgage, take into account the fact that most policyholders have more than one endowment, and ignore people with a projected surplus on one policy that cancels out a shortfall on another, you can get the shortfall figure down to about 35 per cent of people with endowments (not policies).
But, says the ABI in a memorandum to members in advance of the Treasury Select Committee hearing on endowments at the beginning of December, that was then. Now the 'figure is likely to be a little lower than 35 per cent'. Even better news, says the ABI, is that since the research was carried out, 'average investment returns have exceeded the projection rates' of 4, 6 and 8 per cent set by the FSA for calculating projected policy values.
So it could be the case that, if stock market recovery continues as predicted, projection letters may have painted an unnecessarily gloomy picture.
Some projections produced by Friends Provident have made grim reading. According to a report in the industry bible, Money Management, one unfortunate policyholder was not only told that he faced a projected shortfall of just over £9,000 on his policy - which has a target of £25,000 - but also that the projected benefits fell slightly short of the guaranteed benefits in the form of the guaranteed sum assured and the annual bonuses already added.
But, explains Jane Stevens at Friends Provident, it's not as bad as it looks because the computer system 'doesn't take account of the guaranteed portion of the policy' - so it can be the case that once policyholders check their latest bonus statements, what they are guaranteed to get exceeds the projected amount.
'It doesn't help,' she says, 'that, in common with Legal & General, Scottish Equitable and Standard Life, for example, Friends Provident takes the surrender value as the basis on which to calculate the figures for re-projection letters. The surrender value is the same as the cash-in value and doesn't take into account possible final [or terminal] bonuses payable if the policy is kept to maturity. This means projections based on surrender values at the time the sums are done are very likely to be lower than the actual value of the policy at maturity.'
Jon Cudby, writing in Money Management, says the 'result of using this method has led to a huge number of red and amber letters being sent to investors who, as a consequence, believe that their endowment is worth less than it really is [and who] may even be panicked into early surrender'. But Stevens defends this approach as consistent with FSA guidelines, as does Simon Douglas at Standard Life, who says using the surrender value produces 'figures which are realistic and totally consistent with giving customers best advice'.
But Douglas also shares the ABI's view that the 'number of policies with a shortfall will fall' as the stock market picks up.
So have re-projection letters been making consumers worry without good cause? It depends where they are in the cycle, says Stevens, who adds that people whose policies are due to mature in the near future 'could get more than the projected figure'. On the other hand, with policies due to mature in more than five years, there is still some risk.
So if nothing else, shortfall letters are at least focusing consumers' minds on whether they can afford to do nothing or whether they should be poring over the free FSA leaflet 'Your endowment mortgage - have you acted yet?' available to download from the FSA website or on 0845 456 1555.
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