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Review of British Savings Industry Recommends a Major Shake-Up

 

By: Catherine Taylor
Wall Street Journal, July 9, 2002

 

LONDON -- A British government-sponsored review Tuesday recommended the biggest shake-up of the long-term savings industry in more than a decade -- a move aimed at boosting Britain's inadequate savings rates.

The recommendations in the Treasury-sponsored report by former Lloyds of London Chief Executive Ron Sandler call for consumer-friendly changes that envisage a new suite of simple, cheap products that need less regulation. These encompass mutual funds, pensions and "with-profits" policies -- long-term policies that offer policyholders an element of guaranteed return.

The review also calls for a major restructuring of with-profits products, which make up around a third of all new business and are among insurers' most profitable products.

These complex savings products are to be made more transparent, and fairer for policyholders, with a clearer demarcation between their interests and those of companies' shareholders in returns. Some analysts have previously said that a move by the Sandler report in such a direction would lead to a halving of insurers' margins on with-profits products.

The report, compiled over the last year, calls for the new product suite to be branded as "stakeholder" -- along the same lines as the cheap, new pension product that the government introduced in April 2001.

Mr. Sandler recommended that they should be able to be purchased safely "without regulated advice". There should be no initial charge for such products, and annual charges should be regulated, Mr. Sandler said. Given the current 1% charge cap on stakeholder pensions, a 1% charge ceiling would be "a suitable starting point" for such products, Mr. Sandler said, although "this should be reviewed at regular intervals to ensure that it remains appropriate." Also, there should be "strictly regulated" surrender charges, and ideally none at all, Mr. Sandler added.

"There is much that is positive about the industry," Mr. Sandler said. "It has over the years enabled millions of people to save for their retirement. In terms of productivity, it fares reasonably well in international comparisons. But the industry also has some features that are cause for concern." Stakeholder with-profits policies should be more open to scrutiny and "competitive forces" Mr. Sandler said, allowing consumers to make informed comparisons. Instead of company shareholders being entitled -- as they are now -- to 10% of a fund's returns, 100% of the returns should flow to policyholders, Mr. Sandler said. Instead, shareholders would receive a payment through the levying of management charges for running the fund.

He recommended the introduction of annual statements for policyholders, and that payout rights should be more clearly defined -- limiting companies' ability to levy opaque exit charges. The policy payout value should be set out annually, Mr. Sandler said, with the policyholder able to cash in the policy at anytime during the following year at the redemption value.

Mr. Sandler added that proprietary firms shouldn't be allowed to finance other parts of their business with with-profits funds. He added that the financial regulator, the Financial Services Authority, should require all new policies to adopt the new model in full, with the exception of the new policyholder/shareholder profit-sharing arrangement.

The review also called for insurers to stop paying commissions to independent financial advisors -- the backbone of distribution in Britain -- as otherwise "commission bias" could result. Instead, "remuneration should be the subject of negotiation purely between the adviser and the consumer, with no provider involvement." Only advisers adopting this method would be entitled to call themselves "independent."

Mr. Sandler added that tax regimes for long-term savings should be simplified, and that new tax-based savings incentives should be avoided, as "there is some evidence that matching schemes are a more effective means of affecting savings behavior than ordinary tax relief." He also recommended that the current distinction between maxi and mini payment thresholds on Independent Savings Accounts -- a type of government-endorsed mutual fund -- should be removed. Mr. Sandler added that retail savings providers should more effectively communicate their investment strategy to consumers.

The review also called for the FSA's consumer education activities to be given additional resources.

Mr. Sandler made no recommendations on making savings compulsory, although he said the issue deserved "serious and wide-ranging debate." It is estimated that Britons need to save 27 billion ($41.31 billion or 42.15 billion) more a year in order to secure an adequate retirement income.

Investors showed relief that the recommendations were less drastic and potentially damaging to insurers' earnings than they might have been. Aviva, formerly CGNU PLC, gained 4.1% to 517 pence, Prudential PLC was up 4% to 598.8 pence and Legal & General Group PLC was up 3% to 127.3 pence.

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