Eurolife's 'secure' Isa breaks payment promise

Savers who bought a "secure" fund promising a 6.5% a year income for five years are likely to lose up to half their cash - and face a nail-biting 12-month wait before they will discover just how much they'll get back.

The Eurolife Secured Bond Isa, sold as offering "complete capital security" by one IFA, was launched in July 1999. The original capital was due to be repaid in full a week ago.

But the savers who poured £15m into the plan have not been paid the final interest payment and the return of their original capital, both promised for January 23.

Nor did they receive details of a rescue plan, which many advisers, and some investors in the beleaguered fund, believed would be published a week ago. Previously, rescue details were promised in both November and early January.

It now seems that savers might get around half to two-thirds of their money at some time in 2005. But even that depends on complex negotiations which have yet to be finalised.

In the original literature, savers were told by Eurolife, a UK-regulated insurer, that "the Secured Bond Isa is designed to be held until January 23 2005". The only circumstance where they might receive less, savers were told, was if they wanted to encash early.

But now it seems as though those who took their money and ran might be better off.

For the small print showed that the bond was secured not on UK government gilts or triple-A rated corporate bonds but on Eurolife Capital Funding (ECF), a Eurolife subsidiary. ECF bonds are not quoted on any stock market nor are they rated for investment purposes. ECF then lent the money to other companies in the Eurolife orbit.

Eurolife is largely owned by David Wootton and Lynne Green, both criticised by the Financial Services Authority in 2002 when Ms Green and Mr Wootton gave assurances they would curtail involvements in financial services.

Jobs & Money revealed earlier this month that ECF's investment assumptions had failed. And Mr Wootton then conceded only an asset sale would raise the money. Now his one-time confidence that he could pay off bondholders in full by selling Eurolife's closed life fund to another insurer has vanished.

While he now promises "to write to our 2,300 planholders by February 4," he admits they will not get the full amount.

"We now have a draft proposal to put to bondholders. But we are delaying the issue as we want the final contracts to be signed by purchasers of Eurolife Assurance's life business," he says. "It won't be the full sum but it won't be an embarrassingly small amount such as 1p in the pound."

He refuses to be drawn further. But it is clear that bond holders are owed £17m. The majority opted for annual interest and they should have received £7,227. Some chose to roll up interest, so their original £7,000 should have been worth £9,800.

Eurolife is believed to have signed a preliminary contract to sell its life business to a "vulture fund". This should fetch around £11m, based on a £7m reserve fund and about £140m under management. Other assets might fetch £1m or so. That adds up to £12m. Subtract costs involved in the deal and bondholders should receive at least 50% and perhaps as much as two-thirds of what they are owed.

Anything less than payment in full, with interest for the delays, will mean bondholders can complain to the Financial Ombudsman.

Jobs & Money reader Joy Davidson from Surrey put £7,000 into the Isa after receiving a mailshot from Milton Keynes-based IFA Investors Direct in July 1999.

She says: "This letter stressed rate cuts were looking likely so the interest offered was good. But, more importantly for people like us who did not want to risk money, the IFA said 'your capital is safe & secure' with 'no ifs and no buts.' There was a drawing of a padlock to make the point."

Investors Direct managing director Richard Luke pledged a "fixed tax free income" "with the added piece (sic) of mind that your capital is secure." He added: "This Isa is not directly linked to any stock market index and therefore your capital is secure."

In 2003, Investors Direct was bought by Manchester-based IFA Carrwoods. This firm is likely to be free of any liabilities after putting Investors Direct into liquidation.

If Eurolife does send out proposals as promised, investors will have to vote whether to accept the proposals.

At least 75% of bondholders must vote for a deal for it to succeed. All investors will then be bound by this vote. But if the proposed arrangement is thrown out, then, as Mr Wootton admits, it's back to the drawing board.