In 1983, the UK government introduced the mortgage interest relief at source (MIRAS) program, which was designed to encourage homeownership in the country by offering borrowers tax relief on interest payments on their mortgage. Albeit circuitously, this policy paved the way for what followed; the Traded Endowment Policy (TEP) market, where individual policyowners could sell their policy on the secondary market to a third-party investor. Thus, the first substantial secondary life market was born.
The sale of mortgage endowments in the UK eventually became something of a consumer – and therefore political – hot topic, however, as it became clear that the promises offered by manufacturers of mortgage endowments – that the endowment would grow sufficiently large so as to pay off an interest-only mortgage – would not be able to be kept.
So, consumers wanted rid. Enter the TEP market; after a slow start, things began to move.
“Activity in the early 1990s was light but it accelerated quickly,” said Alec Taylor, Marketing and Relationship Director at SL Investment Management. “We were advertising in newspapers, and in the trade press – remember, this is before the internet – and we were fielding an ever-increasing volume of calls a day from consumers looking to liquidate. We were acting as a market maker – buying policies onto our books direct from consumers, then selling onto individual investors via our stock list.”
The market ballooned in the mid-1990s, by which time, TEP investment funds listed on the London Stock Exchange had become a popular way for investors to invest in pooled TEP product. These were closed-ended, 12 or so-year duration vehicles, and by the end of the decade, deals were plentiful as the market was in full expansion mode. The number of trading firms increased from three or four to 20 or more, making the size of the market significant.
“In 1999, there was around £400mn of deals done in the market, and market penetration was probably around 40% by 2000/2001,” said Roger Lawrence, Managing Director of actuarial firm WL Consulting.
But the writing was already on the wall. As early as 1988 – just five years after the introduction of MIRAS – the option for married couples to pool their allowances was removed. British Chancellor of the Exchequer Norman Lamont cut the tax relief to 20% in 1993 and Gordon Brown abolished MIRAS entirely in 2000, by which time endowment mortgages had already ceased to make economic sense.
Similar to the laying down of fine wine, whereby today’s production finally emerges from the cellars many years later, the fuel for a secondary market for TEPs depended on new policy sales continuing to provide tradeable material in the future. The effect of the tax changes meant that new policy sales ceased and though there were still plenty of policies to trade – the typical policy term being 25 years – the end of the market became visible.
For those in the market at the time, they essentially had a quarter of a century runway until they needed to find something else to do. And in the early part of the 2000s, they were still busy, this time, battling one of the most significant economic shocks of the century.
“The bursting of the dot-com bubble really hurt open-ended TEP funds in particular,” said Taylor. “The hit that the underlying insurance companies took on their investments – through their With Profit funds – meant that the value of those policies, and consequently, the TEP funds that owned them, became significantly lower.”
The beginning of the end for the TEP market was juxtaposed with the birth of the US life settlement market. Whilst the 1911 Supreme Court ruling in Grigsby vs Russell paved the way for the industry, the market in its current form has been around since the early 2000s. Taylor’s firm – called Surrenda-Link at the time – pivoted to life settlements in the noughties, and it’s been something of a cathartic experience.
“It made sense to pivot. There are – were – many similarities between the two markets, and although the TEP market was still expanding at the time, everyone knew it would eventually enter run-off. The life settlement space is now almost our exclusive focus, and it’s a market that’s growing, and robust. When you work in a market that has such a long run-off as we had in the UK, you have plenty of time to get over it, but life settlements has been our core business for many years now,” said Taylor.
The TEP market in the UK actually dates way back to 1843, when auctioneers H E Foster & Cranfield started auctioning pure life risk policies, pre-dating the Grigsby vs Russell case in the US that was the pre-cursor to the life settlement market. But now, it’s essentially a footnote in capital markets history. The market has, more or less, returned to the very niche cottage industry that it was when it began 180 years ago. Most With Profits funds are closed and in run off; whilst there are still opportunities for small investors to buy into a developing share of these funds’ surpluses through appropriate vehicles, this is no longer a serious market that would attract institutional scale investors.
This isn’t to say that new secondary life markets might not evolve in the future. In the UK, as part of pension freedom regulatory changes introduced by the Treasury, a secondary annuity market was touted, that would have allowed consumers to realise liquidity out of their fixed annuity contracts, accelerating what would have been future payments. The plan was ultimately scrapped in 2016, but other markets may also arrive as governments and consumers look to find new ways to fund increased longevity and long-term care.
Still, given that With Profits savings are out of fashion, what is left is highly regulated and risk-averse regulators have very little apparent appetite to bring the mortgage endowment market back at scale.
“It worked. The market delivered value to the public and to investors for 25 years,” said Lawrence. “But the regulatory mood is against providing alternatives, so, to all intents and purposes, it’s sadly now come to an end.”
