When you risk falling short

This week saw some rare good news on the endowments front. Around 80,000 people whose policies were at risk of leaving them with a mortgage shortfall have been given the all-clear, provided certain conditions are met.

Australian financial services giant AMP, the company that owns insurers Pearl, London Life and NPI, has unveiled a "mortgage promise" which it says will reassure customers of these three firms who are worried their endowment won't grow sufficiently to pay off their home loan.

It is the latest company to effectively promise to make up potential shortfalls, so that people don't have to dig into their own pockets to make up the difference.

Norwich Union, Commercial Union, General Accident and Provident Mutual (now all part of the CGNU group), and Standard Life have announced similar pledges. But there are some rather crucial strings attached to its offer.

Almost 150,000 people have mortgage endowments with AMP companies. Around 70,000 of these have already been told that their policies are on track to repay their mortgages, and AMP says it is now promising the other 80,000 that their endowments will reach their target values, provided the funds in which policyholders' money is invested earn an average of at least 6% a year after tax for the rest of the life of the policy.

Policyholders must also continue to pay the current level of premiums for the rest of the term.

Tom Fraser, managing director of AMP's UK financial services division, says that no with-profits endowment from an AMP company in the UK linked to a mortgage has failed to pay off the loan so far.

"I can see no reason why any should fail in future unless investment returns fall further than we currently expect," he adds. "We believe that it is reasonable to expect annual average growth of 6% after tax in the future. Therefore we recommend that our customers should take no immediate action as a result of the current endowment review."

Despite all the controversy about endowments, Mr Fraser insists that the overwhelming majority of people who took one out in the past "are better-off today than if they had taken a typical repayment mortgage". But he adds that today's low-inflation, low-interest environment mean the company no longer recommends an endowment for someone taking out a new mortgage now.

This week's announcement is particularly good news for people holding Pearl endowments. A Jobs & Money survey carried out six months ago into which insurers had the most serious problems with potential shortfalls found that Pearl had some of the worst figures.

We had asked insurers to reveal how many of their endowments fell into the "red" and "amber" danger zones, where the amount projected may fall short of the cash needed to repay a mortgage.

Pearl said at the time it had 140,000 policies held by 100,000 customers, of which 40% (56,000) fell into the red category and 20% (28,000) fell into the amber category.

Two months ago Norwich Union gave the same promise to its customers whereby, provided the 6%-a-year future investment earnings target is reached, it pledged that policies will meet their target values and if necessary it would top up any shortfalls.

This was identical to the pledge offered by parent company CGNU to policyholders who bought endowments under the Commercial Union, General Accident and Provident Mutual brands. Standard Life, the biggest single endowment provider, also has a similar promise.

Liverpool Victoria has gone even further - it gave a no-strings guarantee to all its endowment policyholders. However, there are only a few beneficiaries as Liverpool Victoria only has around 7,500 endowment policies.

This week's move by AMP will put pressure on other leading providers to follow suit.

Endowment holders who are worried they could be left high and dry if their policy doesn't perform properly could do a lot worse than firing off a letter to their insurer pointing out that several other companies have now announced promises, and asking them if they intend to do the same.

A wodge of correspondence from disgruntled policyholders just might make the boss sit up and take notice.