The charge against Standard Life endowments

Approximately 100,000 Standard Life endowment holders are facing possible shortfalls of 12 percent because their premiums were set at an artificially low level by insurers. Standard Life customers who took out a Homeplan policy in the early 1990s are affected. Shortfalls may potentially come to more than £250 million as a result of the failure by some insurance companies to clarify the full charges that were being levied on these savings plans.

"Standard charge projections" were used by Standard Life in order to set its policy premiums. These were in turn determined by the industry's former regulator, the Life Assurance and Unit Trust Regulatory Organisation (Lautro). But these projected charges were considerably below Standard Life's actual charges.

As a result policy holders actual monthly premiums were notably lower than they should have been.. The policies then appeared to seem more reasonable compared to some of their competitors, however, this meant in reality, the investment performance had to be better, or consequently policyholders would lose out.

In most cases this was never explained to policyholders when they bought the plans.

The principal researcher at Which?, states the practice was common within the industry in the late 1980s and 1990s: "Some bright sparks worked out that if they applied their own charging structure, they would look uncompetitive. But if they used Lautro's projections to determine premiums, they would look conveniently cheaper than a repayment mortgage."

Therefore Homeplan policies sold between 1991 and 1994 carried the possibility of an "inbuilt shortfall". This adds to further losses resulting from poor investment performance.

Upon detailed study of a typical policy sold at that time, it was discovered that investors were led to believe they needed an average 7.5 per cent annual rate of return to meet their target amount at maturity. Actually, it needed to attain 8.4 per cent a year to pay off the home loan. The annual rate of return in Standard Life's with-profits fund since 1994 has been just four per cent.

Ever since they were initially introduced in 1988, here has been speculation about Lautro's projected rates .Many financial experts feel that if policyholders were misdirected about the charges they were being asked to pay, the companies that sold the policies ought to compensate them.

Indeed, the Financial Services Authority, declared that in 2001 up to 11 other companies which sold policies that used similar charging structures to that of Standard Life were investigated .They found that some companies had been involved in "pre-contractual misrepresentation and in some [cases] a breach of contractual warranty".

Following this investigation, it has been recognised that several insurers including Norwich Union, Legal & General, Scottish Widows and Axa, then took action and quietly paid compensation to tens of thousands of their customers .Standard Life did not follow suit.

A spokesman for Standard Life insists the insurer was only complying with the regulator's instructions at the time. He protests that insurers were not permitted to present any other figures to their client. He claimed that policyholders received regular updates based on actual, as opposed to Lautro, charges.

The spokesman continued that Standard Life literature clarified that the figures presented "in no way formed a part of the contract [and] charges could change over the term of the policy".

Standard Life, suggest that financial advisers (IFAs) who recommended its products were themselves responsible for the level of premiums their customers should pay: "The Homeplan contract offered some flexibility … at the discretion of the adviser." Though the company refuse to state how many IFAs, in actual fact, advised their policyholders pay higher premiums.

Financial commentators are also pointing the finger at the industry’s watchdog at the time, for demanding insurers give "average" charge projections that were much cheaper than the vast majority of charges actually levied on the policies they sold.

They suggest that policyholders today may even have a case for redress not merely from insurers but also from Lautro and its successor, the FSA.

Jun 4, 2005
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