Lifting the lid

By JAMES HOPEGOOD
Updated: 19:00 EST, 28 May 2002

NEW proposals published this week aim to force the £385bn with-profits industry to put its house in order.

Millions of people rely on with-profits savings plans run by insurance companies to build up money for retirement and pay off their mortgages. Insurance companies will be forced to tell policyholders how much money they make in a year on their investment.

People buying policies must be told exactly what the risks are at the outset, as well as which benefits are really guaranteed and which are not.

Savers will also be told how much of this profit the insurance company adds to their plans each year as a bonus, and how much it holds back to smooth out the bad years when it makes a small profit or even a loss.

These endowments, pensions and bonds were bought on the basis that they would provide a halfway house between unexciting savings accounts and risky but potentially lucrative shares.

But millions of savers are facing shrinking returns which are insufficient to pay off their mortgages, while those in the troubled Equitable Life have less saved towards their retirement than they thought.

City watchdog the Financial Services Authority (FSA) has been forced to step in. The FSA proposes an overhaul of the information given to savers. They need to know whether they are being treated fairly and the strength of the company providing their pension or mortgage money.

The watchdog wants companies to give clear information to savers about how these plans work. This includes highlighting how they calculate the annual returns - known as bonuses - how they can change them and if they are allowed to add extra charges during the term of the policy, which can run for as long as 25 years.

Eleanor Linton, manager of the FSA with-profits review, says: 'An awful lot of people do not know that they are invested in shares and the risks that are portrayed are not clear enough.'

Policyholders' annual statements will have three essential figures in them:

• THE cash-in value - the amount you will get if you cash the policy in now.
• THE value on death - how much your beneficiaries receive if you die.
• HOW much you can expect if you carry on paying in for the full term of the policy.

The underlying value of a saver's share of the fund - called the asset share - will also be included.

Insurance companies quoted on the stock exchange will also have to disclose how they carve up their orphan assets between policyholders and shareholders. This is basically money which they have made in profit during previous years which has not been handed out to either policyholders or shareholders.

The FSA is proposing to create a new 'policyholders' advocate' who would be involved at all stages of negotiations on how orphan estates are divided up, and will be there specifically to get the best deal possible for customers. Companies will also have to reveal the true nature of their liabilities. This will show not just what they have guaranteed, but the cost of other benefits savers have built up. This could make some companies look a lot less healthy than they do now.

Peter Ward is one of the millions of with-profits customers who are rapidly becoming disillusioned with their investments.

Research scientist Mr Ward, 43, from Southampton has been paying £55 a month into a 25-year Friends Provident mortgage endowment that he started 15 years ago. He does not yet have a shortfall to make up, but is worried that its growth has fallen with no real explanation.

Mr Ward says: 'It is clear that the with-profits industry is incapable of regulating itself. The information we got at first only concentrated on the plus points of getting a big bonus at the end of the term. We get annual statements, but to try to decode them is practically impossible.'