Issue 270 of SOCIALIST REVIEW Published January 2003 Copyright © Socialist Review





Mortgaging our future

Sold a load of lies about mortgages
Sold a load of lies about mortgages

Just like the great pensions mis-selling scandals that rocked the UK during the last decade and brought misery to millions, along comes another personal finance disgrace that could swallow up the savings of hundreds of thousands of people.

According to figures recently released by UK insurers, 60 percent of the UK's outstanding 10 million endowment mortgages are forecast to fall short of the amount needed to repay the original loan. Across the country more than 6 million people have endowment mortgages. In the last two years, some 500,000 endowment holders have been sent letters coded 'red'--warning that their policies will be worth too little to pay off their mortgages. A further 2.5 million households have received 'amber' letters warning them that their policies are in danger of falling short. And these figures are set to rise further as more customers than ever before are likely to receive 'red' warnings, due largely--but not entirely--to falling equity prices on the world's stockmarkets.

There are now hundreds of thousands of workers facing the predicament of how best to recoup the money that they invested in such policies. The same financial 'experts' that advised millions of people to invest in endowment policies 15 years ago are now warning people to steer clear of either increasing their payments on an existing endowment or buying a new one, saying that it is a case of 'throwing good money after bad'. As a result, many people are now being forced to change their mortgage into a part-repayment loan, which means that in addition to paying off the mortgage interest each month, people have to make extra payments to start paying off the underlying mortgage debt.

The insurer Friends Provident told customers last year that a payout on a 25-year endowment policy maturing for 2002 would fall to 77,096--compared to 93,145 had it matured the year before. Even the City's watchdog, the Financial Services Authority (FSA), has had to sit up and wave a big stick at lenders to try to calm policy holders. On 4 December the regulator imposed a record 1 million penalty on Lloyds TSB for mis-selling endowment mortgages and made clear that more big fines were in the pipeline.

The UK's third largest bank was forced to set aside provisions of 165 million to compensate between 42,000 and 46,000 policy holders, which breaks down to an average payout of around 4,000 per policyholder--one quarter of the loss pointed out in Friends Provident's example. These policy holders were mis-sold endowment mortgages between 1995 and 1999 by the Abbey Life arm of Lloyds TSB. The FSA has so far identified 20 life assurers as having potentially mis-sold mortgage endowments, though not all will necessarily be fined. They have collectively set aside 448 million for 266,000 customers.

These claims for mis-selling mostly affect life offices that had their own salesforces. To date, the FSA has named only three: Lloyds TSB; Winterthur Life, which was fined 500,000 last year for mis-selling; and Royal Scottish Assurance, fined 2 million two years ago for mispricing endowments. According to analysts, other likely candidates included Axa, Allied Dunbar, Lincoln, Sun Life Canada and Royal & Sun Alliance.

In spite of this tough stance, the regulator has so far resolutely resisted pressure to launch a wholesale review of endowment mortgages such as was ordered for pensions mis-selling. Sir Howard Davies, FSA executive chairman, has said the administrative cost of such a probe would be about 5 billion, and that it would be wrong to foster a regime that compensated for investments not performing as people would like. The Consumers' Association estimates that up to 5 million people were mis-sold endowments. But it has now been largely acknowledged that buyers of endowments could never have hoped to achieve the payouts promised anyway. This is not just because of falling stockmarkets--the excuse peddled by endowment companies--but because the amount the companies took in charges were far higher than they told customers at the time.

During the period when millions of endowment policies were sold, at the peak of the late 1980s property boom, insurance companies routinely projected forward the benefits of the endowments, assuming that only 0.3 percent a year would be lost in charges. But the real amounts were often four or five times higher. Remarkably, the persistent underestimation of charges--and overestimation of future returns--came with the blessing of the industry's regulator at the time, Lautro. It was only in 1995 that Lautro capitulated and since then insurance companies have had to reveal their real charges, though the details of how these charges are calculated are usually in small print and obscured by legal and financial jargon that very few customers can actually understand.
Neil Hodge


  • In the US state of Kansas a 'one size fits all' answer for school children makes scientific controversy a thing of the past. In response to religious right challenges, if a child asks why scientists and ministers disagree on the age of the earth, how the Grand Canyon formed, or whether light was refracted before Noah, the curriculum tells teachers to give the simple reply 'just because'.

  • There are big savings to be made by mobile phone users if they switch to another network provider. So says the Consumer Association magazine Which? on its website (www.switchwith It estimates that for the 7-8 million people who have been on monthly contract for 12 months or more, switching to a better deal could save them 80 a year.

  • Look's like a Nokia
  •'s automated recommendation system, which tracks similar purchases, ruffled some more evangelist feathers recently when the book Six Steps to Spiritual Revival trailed another book on anal sex.


    From final salary to the final straw

    The issue of pensions can lead to mass protest, as was seen in France recently
    The issue of pensions can lead to mass protest, as was seen in France recently

    When is a fraud not a fraud? This is a question that millions of people will be asking themselves as increasing numbers of employers reduce, or default on, pensions that workers have been paying into for years.

    One of the major causes of the growing pensions crisis is the closure of 'final salary' schemes. Fifty six percent of companies which have reviewed these in the past five years have closed them to new applicants according to consultants Watson Wyatt, and many existing employees have been switched to more risky 'money purchase' schemes. On average bosses pay half into these schemes what they would to final salary pensions.

    Final salary pensions were meant to guarantee a retirement income calculated from the salary in your last year of work and your length of employment. Companies had control over the investment of the funds--hence their initial attraction--but they were meant to be liable for any shortfall. In the boom years of rising stockmarkets and higher interest rates many companies took 'contribution holidays', ie they stopped paying into the funds. But now profits are tighter many firms, including Sainsbury's, Iceland, the four biggest banks and BT, are abandoning the schemes.

    Royal Ordnance, which produces ammunition for the Ministry of Defence, has taken a 12-year 'holiday' from pension contributions, and has the cheek to demand that workers pay up to 20 a week extra if they are to receive the pensions promised them. Over 4,000 workers at nine factories have voted more than nine to one for industrial action over the issue.

    This sort of action, which has led to large protests in much of continental Europe, is necessary if the rip-off is to be halted. The government has proven itself totally unwilling to stand up to the corporations responsible for the crisis, the blame for which, as Amicus general secretary Derek Simpson has said, they are trying to shift 'from the perpetrator to the victims'. So instead of offering workers the protection recommended by the pensions advisory service Opas, New Labour's work and pensions secretary Andrew Smith has told us we will 'either have to save more or work longer, or some mixture of both'. New public sector workers are to have their retirement age raised by five years to 65, and rather than restore the link between the state pension and earnings that it promised in opposition, New Labour wants to 'encourage' people to work past 65. GMB general secretary John Edmonds has promised to oppose this 'work till you drop culture'.

    Government proposals will not give workers the protection they need. Take the example of steel company ASW, which went bust in July. Hundreds of workers at the Sheerness plant will get substantially less than their full entitlement--perhaps only half--and many Cardiff workers who have contributed for up to 30 years could get nothing. Under current rules a company which goes bust must prioritise existing pensioners before sharing out whatever, if anything, is left to current workers. Two ASW directors quite legally took early retirement shortly before this happened, assuring themselves of pension packages worth more than 140,000 a year, with an eventual cost of about 2 million. Under government plans City fat cats will still be able to grab up to 1.4 million before they lose tax relief, and former CBI boss Adair Turner will head the pensions commission.

    Companies will still be free to unilaterally wind up final salary schemes until April 2004. 'Independent trustees', appointed by the liquidator to administer pensions of companies that have gone into receivership, will still be able to charge extortionate 'costs' from pension funds.

    However, not all pensions are subject to the slings and arrows of outrageous fortune making. The Lord Chancellor, Derry Irvine, is to get a 180,000 lump sum and an annual income of 90,000 when he steps down from his government post. Nice pension if you can get it.
    Andrew Stone


    Reignite the anger

    Fire Brigades Union (FBU) demonstration
    The Fire Brigades Union (FBU) is committed to two 48-hour strikes from 28 January and 1 February should talks with the employers set to take place in January fail. The government is determined to impose the attacks that are contained in the Bain report, released shortly before Xmas. The report suggests large job losses and attacks on conditions and fire cover as the future for the fire service. The solid strikes before Xmas along with a high level of popular public support points the way to a firefighters' victory. With the employers still appearing set on taking a hard line, and with many firefighters angry and determined to achieve a decent pay rise, this is a dispute that is far from over.



    The safest pair of hands

    Kenyans had good reason to cheer when Uhuru Kenyatta was heavily defeated in the presidential election at the end of last year.

    Kenyatta was the chosen successor of Daniel arap Moi, the man who ruled the country for 24 years from 1978. It was probably a surprise to many people that Moi did not fiddle the result this time--as he did in 1992 and 1997. Such blatant rigging was passed over by Moi's western backers, who saw him as a valuable agent of 'stability' in the region. Moi got on very well with the British Tories. Kenya's prestigious Moi University proudly boasts the Margaret Thatcher library. During the first Gulf War in 1991 against Iraq, Moi lined up completely with US demands. In return he won financial aid from the British government and military support from the US.

    The Kenyan vote is a sign of mounting resentment at years of poverty, lack of democracy and a tiny elite creaming off most of the wealth. It also demonstrated how Africans can overcome efforts to divide them on 'tribal' lines. The ruling party's crude efforts to play on regional and ethnic backgrounds completely failed.

    But there is very little chance that the new man in charge, Mwai Kibaki, is going to bring any real change. Opponents of dictatorial regimes can be elected on the basis they stand for 'democracy' without in any way offering an alternative to the capitalist economic policies that are the root of the repression. This is what happened two years ago in Ghana, where John Kufuor was elected. He put forward a 'fresh start' after the Jerry Rawlings era. But Kufuor then worked cosily with the privatisers and the bankers while they turned the screw on ordinary people.

    We can expect the same from Kibaki. He spent years at the centre of Moi's governments, and is committed to working alongside the western governments and international agencies. Such a 'safe pair of hands' was why in the end the west may have preferred an opposition win to a desperate effort by Moi's man to cheat his way to power with all the violence that would entail.

    Given that the US may want to use Kenyan bases in a war against Iraq, George W Bush wanted calm in East Africa, not turbulence and embarrassment for the west about its support for dictators. The hope in Kenya is that the massive feeling for change, evidenced in the election, will find a real focus based on struggle from below.
    Charlie Kimber


    A virtual world to win

    If you were one of the tens of thousands of people who bought a computer game (or indeed other software) for Xmas, then you are probably still smarting from the price you paid. Computer software manufacturers are as likely as any other company to try to charge the maximum price possible, but as the internet-based Fairplay campaign, which campaigns over the price of games, says, 'Compared to video games, replica football shirts are a bargain.' You can join their campaign at www.fairplay-

    The average new computer game costs around 40, and the number of games sold makes the games market worth more than the video and cinema industries in the UK. The average cost to develop a new computer game title is 1 million. And the potential sales involved mean some companies are willing to risk a lot of money in the hope of making massive profits. Nintendo was recently fined 94 million by the EU after being found guilty of price fixing--see computergames/ story/ 0,11500,822994,00.html

    Other companies are jumping on the bandwagon. You may have heard of or even played the highly successful game series The Sims. In this you control a character in a virtual world--running their life, work and even social time. As part of a large advertising deal, players of the latest version--Sims Online--will now be able 'to buy McDonald's hamburgers in the game that are superior to unbranded burgers and even set up their own McDonald's franchise'.

    This is new ground for the multinationals. The general manager of Electronic Arts, the producers of the Sims series, says this 'signals a watershed for in-game advertising. It marks the first time players can interact with everyday brands and products in a virtual world. Our sponsors recognise the value of interacting with consumers in this environment.' See IAR/ article.php/10789_1464841

    But it's not all one way. The website tiny/ is dedicated to bringing anti-war and peace slogans and posters to the virtual reality world of The Sims. It even includes a tiny reproduction of the Stop the War Coalition poster advertising the 28 September march against war on Iraq.

    Now there is a virtual world to win, as well as the real one.
    Martin Empson
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