NU reveals full extent of endowment shortfall

by Gill Montia

Story link: NU reveals full extent of endowment shortfall

Norwich Union (NU) has reduced it endowment payouts by up to 10% while at the same time admitting that over 90% of 900,000 policies sold by the company to pay off mortgages are unlikely to reach their targets.

The figures mean that a 25-year, £50-a-month NU mortgage endowment maturing in 2008 will pay out £39,357, a fall of 6.5% on a similar policy maturing in 2007.

Former Commercial Union policies now owned by NU have fallen by a full 10%, down to £39,321.

As a result, the majority of endowment policies managed by NU will not provide sufficient funds to pay off the mortgages they were bought to support.

The insurer says that the number of policies designated as “red” rose to 90.3% in 2007, compared with 89.5% in 2006.

The bulk of the policies were taken out in the mid to late 1980s when endowment policies were sold in anticipation of returns averaging more than 10% a year.

Of the 48,000 policies that matured in 2007, around half were in shortfall but this number will rise in future years because returns have been falling further behind.

This is because of lower interest rates but critics also blame the failure on high commission rates paid to advisors when the policies were set up.

However, in 2000 NU promised to protect customers from the worst of the shortfalls.

Last year, the insurer paid out £10 million as part of its endowment pledge, although the pledge is conditional on the investment reaching certain targets.