Britain's £50bn endowments black hole

Up to 70 per cent of endowment policies will not pay off the mortgages they were intended to cover, leaving more than 6 million savers up to £50bn out of pocket, the chief executives of five of the UK's largest insurers admitted yesterday.

The revelations came as the heads of Standard Life, Prudential, Aviva, Legal & General and Royal & SunAlliance were put to task for enjoying pay rises of between 45 and 71 per cent by MPs while savers are left in misery. The chief executives yesterday confessed that their customers were seeing average shortfalls on their policies of between £3,400 and £7,000, and estimated the bill could be between £30bn and £50bn over the next 15 years.

"How can you justify these pay figures? The average pay increase was 3.5 per cent last year. You can surely explain why you are wonderkids, but then people are feeling the pinch and are suffering, this seems way out of line." John McFall MP, chairman of the Treasury Select Committee, which is investigating how to restore confidence in long-term savings, said. Jim Cousins MP said the situation was "of enormous economic and social significance."

The shortfall figures dramatically increase the scale of the endowment problem faced by savers. The Association of British Insurers insisted that only 1.5 million people were facing shortfalls on their policies, and the Financial Services Authority recently suggested 3.5 million had a funding gap. Up to another 15 per cent of endowment savers have policies in "amber" status, which means there is still a high probability that their mortgage will not be covered.

Including "red" letters, which show the policy is unlikely to pay off the mortgage, 86 per cent of Standard Life's policies are struggling to meet their mortgage target.

Surveys by consumer groups suggest that up to 50 per cent of all endowment mortgages were mis-sold and MPs yesterday reprimanded insurers for failing to make customers aware of the complaints process. "There are no references in your red letters to policyholders of the complaints process or how to complain. You give routes as to what action customers should take, but you do not even refer to the route of complaint," Norman Lamb MP said.

Only a small proportion of customers has complained about their endowments so far, although complaints levels are rising. Mr Harvey said Norwich Union received 1,500 complaints in 2002, but 15,000 in 2003. This is only, however, about 4 per cent of its customers. It is upholding about 50 per cent of all claims, but Legal & General and Standard Life yesterday admitted they had kept poor records of customer sales and were upholding about 90 per cent of complaints.

MPs said insurers had failed to show "any duty of care" to customers and had consistently put its own interests first. "Once the product is sold and the commission to advisers paid, you have no interest. The customer bears all the risk," Mr McFall said.

David Prosser of L&G said lack of confidence in the industry was the result of the fall in equity markets, rather than mistrust in insurers. But Sandy Crombie of Standard Life and Jonathan Bloomer of Prudential admitted that insurers had failed to contact their customers soon enough to warn them that their policies were in danger. "We do regret that we didn't warn customers earlier, given the shifting economic changes," Mr Bloomer said.

Mr McFall also shamed Mr Crombie for failing to provide the Committee with information on its endowment problem. "We have asked for this information repeatedly. Isn't it grossly misleading to say that you do not have any problems and that this means nothing for policyholders? Is this flying in the face of reality?" Mr McFall asked. Mr Crombie insisted that Standard Life was a strong company."