Endowment crisis is escalating

THE City watchdog is issuing a nationwide warning amid mounting evidence that the endowment mortgage scandal is escalating.

The Financial Services Authority is to launch a publicity campaign alerting families to the massive shortfalls.

More than six million investors who bought endowment plans to back their home loans appear likely to lose out. The shortfall on each policy was previously estimated at £3,000, but the figure could now climb to an average of £11,000 or even £14,000. The final UK-wide shortfall could run to £95bn, according to industry gurus.

More than three-quarters of the endowments are on course for failure, but it is believed that more than 90% of those maturing by 2008 will fall short.

Endowments were at the centre of a hard-sell by insurance companies, banks and building societies in the 1980s. Families were promised the plans would raise enough money to clear their loans and provide a tax-free lump sum as well.

But the reality for millions is that the policies will not deliver enough to clear their home loans. They will have to use other savings to pay off the debt.

Insurance companies are blaming the poor performance of world stock markets. However, the Consumers' Association points out that these companies creamed off hundreds of millions of pounds in fees and charges in the early years of the schemes - cash which could have been invested during the stock market boom years.

Ned Cazalet, an endowments expert and insurance industry analyst, has warned the FSA that most people being sent letters warning about their endowment failures simply do not understand them. As a result, many are burying their heads in the sand.

Cazalet said: 'These policies are going into shortfall in massive numbers. There is not the remotest chance that they will pay off. Within a few years, all of the endowments maturing will have a shortfall. People cannot afford to ignore this. They must take action.'

There are several options for those facing shortfalls. For example, they can convert their mortgage into a repayment loan, where they pay back some of the capital as well as the interest, or they might find some other way to save to cover the sum.

'We are talking about shortfalls of £10,000 plus,' said Cazalet. 'When you have an average wage in this country of £23,000 before tax, that is a huge sum.'

The FSA publicity drive follows complaints from the Consumers' Association that it has done too little to protect consumers.

This is the worst crisis since the private pensions fiasco of the 1980s, when millions were conned into opting out of company and public service pensions.