Sunday, 18 December 2011

City thieves should have their nostrils slit

On the face of it, there was nothing wrong with the idea of an Endowment Mortgage. Instead of paying off capital directly, you diverted the same monthly sum to buying equities. Over the long term - say two or three full economic cycles - the rise in the values of equities would comfortably pay off the capital sum. Several things went wrong, most of them attributable to the greed of the fund managers. First up was a hefty commission paid to the Estate Agent who arranged the Endowment, then punitive management fees every year, and finally they managed to mis-invest the money in equities and funds that performed significantly worse than the FTSE 100. As a result, they killed-off the Endowment Mortgage. 

Now of course the Observer reveals they've been doing the same to our pension pots. A saver who made contributions of £70,000 between 1994 and 2009 would have seen the entire £46,000 profit in the rise of the FTSE 100 swallowed in fees and charges by the financial sector. The UK financial sector currently makes 3.2% a year out of our investments, most of it fat salaries and bonuses enjoyed by traders and fund managers. 

Frankly, this makes me want to see their nostrils slit with a rusty gutting knife, with ear-cropping for a second offence. 


Anonymous said...

There is another aspect to this of course Raedwald…

The unhealthy relationship between government and these corporate cowboys, that which Mussolini (among others) called corporatism/fascism.

Us normal folk, without any skills, would have been able to invest our own money and most of us would have made a profit, but this was not allowed. If you ever take a look at an annual pension statement, it seems to be designed to keep your money, and the government does not allow one to divert it to something else.

So please add me to the roster for rusty knife duties, which of course will hurt me much more than it will hurt those who are slit/cropped.

Anonymous said...

The circumstances behind the invention of the endowment mortgage tell another side of the story. Yes, there were hefty commissions and unfair annual management charges but that would not explain why two of the leading providers gave stellar outperformances to their customers. Legal & General and Liverpool Victoria (not connected with either other than owning an LV policy) delivered the goods, with the latter never having to issue an underperform notice to any of their customers.

The other side of the story was successive governments choking off the environment that allowed the endowment mortgage to flourish and remain viable. Consider this; a policy holder used to get a tax relief called Life Assurance Premium Relief (LAPR) from the tax man at 15%, so in this case, the sensible route to insuring your debt in case of death also created a vehicle for growth, or the potential for it. And at the same time there was lower and higher marginal rate relief (25 and 40%) tax relief of the interest paid on the mortgage, so it made absolute sense to have a vehicle (endowment policy) that made sure that your capital repayment did not reduce the amount of interest over the term; and that is sensible if you are a tax payer; especially a 40% tax payer. Both of these tax reliefs were gone by 1991 and hence all the advantages of the endowment went with them.

Once again, the British Government is quite happy to offload its share of the blame onto other institutions; in this case insurance companies, for their own economic vandalism.

None of the above relates to the pensions industry.

Coney Island

formertory said...

To say that "they misinvested the money in equities that performed significantly worse than the FTSE100" is a misrepresentation. Endowment policies were all "with profit" contracts and so each year a bonus based on the profitability of the entire issuing company was added to the policy. In the good years, some of the annual bonus was held back in a special pot; it was used to accrue a "terminal bonus", added when the policy matured.

The problem with endowments ONLY arose when the "low cost" endowment came along, in which the guaranteed sum assured was significantly less than the mortgage and the annual bonuses were anticipated (in the sense that "assumed performances" were used to work out how much future annual bonuses would be). Obviously, the higher the assumed future bonus rate, the lower the guaranteed sum assured could be, and so the cheaper the policy.

And therein lies the nub of it. "True" endowments were expensive because the guarantee was the amount of the mortgage. Through the heyday of those contracts, with inflation running up into the high 20's of % and interest rates peaking at 18%, a chimpanzee could have got returns of 15%; as it turned out, many insurance company employees turned out to be just that - chimpanzees.

What really happened was that the low cost "with profits" endowment, with its highly conservative investment strategy met the decline of interest rates following the withdrawal of the UK from the ERM in 1992. Perversely, of course, it was that same event which revitalised the economy for Blair and Brown to claim they'd worked some magic. "With profits" funds were predominantly invested in Bonds and as yields fell, so did "profits".

So where I will agree with you is that the insurance industry created a vehicle to allow the lower-income and less well-informed speculate with bonds and investment. They created a massive sales industry to sell these highly profitable (for them) products. They did not warn people adequately that this product was a speculative investment.

However, at the heart of it, this was a speculation. Those "investing" took the risks that all investors take (and yes, I was one of them, back in the day).

Those who cry out about injustice manage to overlook that despite the lack of a bonus on the speculation, their house has multiplied massively in value and that they has years of life assurance protecting their families.

And as Anon / Coney Island says - none of this is about the pensions industry, which has questions of its own to answer - but no more than does the Government who (just as they encourage high property prices to keep people happy, by incorrect taxation of property) by fiddling and farting about with tax allowances and Lifetime Limits are conspiring to keep millions of non-public sectoir workers in penury.

And no, I don't and haven't worked for an insurance company.

Oldrightie said...

The foregoing comments are measured and compliment the blog post very well. Intelligent discussion, supported with facts is something we rarely observe in Government anymore. Just candy floss grubby power seeking. The EU the Masters in every sense!

Raedwald said...

Oldrightie - agree. And once again the informed comments leave me rather wiser than I was when I made the original post ...

Mark Gullick said...

Interesting insight into the lumber-room of your mind, what with the nostril slitting and all. Do you think that that type of rhetoric helps the cause of dissenting blogging, or just makes it easier for the pansy intellectual left to dismiss you? Just asking.

Raedwald said...

Mark, you're quite right. I should have said hang the bastards from Cabot Square with piano wire.

FrankS said...

Can't argue with either your analysis or your method of retribution.

formertory said...

Can't remember where I saw it or who said it, but I'm reminded that every politician should have a noose round his neck - be it wire or the finest hempen rope - to keep him upright. In all senses of the word.

Wildgoose said...

Coney Island explains why Endowment Mortgages originally made sense, but haven't since 1991. Since that time, anyone taking an Endowment Mortgage was in effect borrowing in order to invest in the Stock Market and make a profit.

Of course, it isn't that easy, (or else everyone would do it for the "free money"), and so Endowment Mortgages don't make sense. Pension Mortgages are specialised and useful only to a narrow section of people, (and are also under legislative threat), so the only Mortgage that makes sense is the honest Repayment Mortgage.

formertory said...

so the only Mortgage that makes sense is the honest Repayment Mortgage

I'll drink to that, except I'd prefer to insert the word "any" between "makes" and "sense". If you have to rent money to buy a house, as opposed to cutting out the middleman and renting a house, a repayment mortgage is the only way to go.

The decision made by borrowers to rent money is in large part why banks like (and encourage) over-inflated property prices; they get to rent more money for longer because people rarely take into account the rental premium (interest) when they assess whether they're making a rational decision. Simply, it's more profitable for banks.

Felcy said...

Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.


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