Sandler grapples with the with-profits problem

When Ron Sandler was appointed Treasury tsar to investigate the long-term savings market, the press coverage was less than overwhelming. "Oh no, not another of New Labour's wretched reviews", reasonably summarises the general response. But that was before Equitable Life turned really nasty and gave Mr Sandler's task meaning and legs. The former Lloyd's of London chief executive will be guaranteed a good audience when he publishes his initial thoughts on the matter next week.

As Mr Sandler correctly points out, the biggest area of concern in long-term savings lies with the life assurance industry's most important product – the with-profits life fund. Lack of transparency, poor surrender values, opaque charging structures and the high degree of discretion given to product providers on how to allocate returns make the with-profits method of saving out of step with modern standards of accountability and openness.

And yet with-profits remains far and away the single most popular way of saving for life, accounting for half of the industry's outstanding liabilities and a third of all new sales. The sales proposition is certainly a compelling one. Because of their solvency capital, life funds are able to "smooth" returns across the life time of the policy, thus protecting the saver from market volatility. It seems a wonderfully reassuring way of investing in the stock market.

If the market happens to be 20 per cent off its peak at the time the policy matures, it shouldn't in theory make much difference. You should still get your 7-8 per cent rate of annual return across the life time of the policy once accumulated annual bonuses and the terminal bonus are rolled in. The Equitable Life débâcle is a special situation, but it has none the less served to challenge many of these assumptions. As a mutual, there was no one else but the policyholders to bail the life fund out when the management cocked up.

Even discounting the guaranteed annuity débâcle, the management's actuarial calculations seem to have been over-optimistic, while the Financial Services Authority's regulatory stamp of approval turned out not to be worth the paper it was written on. Interestingly, Equitable was actually a good deal more transparent than most life companies.

Furthermore, there were warning signs. Standard & Poor's reduced its credit rating on the fund from double A to credit watch more than two years before the balloon went up. Even so, in a country where the vast bulk of savers wouldn't understand the difference between a money purchase and a defined benefit pension scheme, it would be preposterous to expect them to get to grips with the byzantine complexities of a large life fund. The FSA plainly didn't, so what hope for the ordinary punter.

Equitable has highlighted the possibility of catastrophic failure to deliver, and the FSA's impotence in the face of such failure. The FSA refuses, for instance, even to put its name to published independent assessments of life fund solvency, ostensibly on the grounds that a poor rating would interfere with the company's ability to do business, but more probably because it might lay the regulator open to claims for compensation when a highly rated life fund does an Equitable. Yes, we are responsible for regulation, is the FSA's attitude, but please don't try to hold us responsible when things go wrong.

Nor would it be wise to count on the Equitable being a one off, especially in these market conditions. Clerical Medical ran into not dissimilar problems a number of years ago when a business venture in South Korea failed to work out and damaged the company's solvency to the point that it was forced to sell out to Halifax on unfavourable terms. These events are not as rare as might be hoped.

The wider issue Mr Sandler has to deal with, however, is the general lack of reference points which the saver has to steer him through the maze of the with-profits sector. Other areas of the long-term savings market aren't perfect either, but at least there are reliable performance tables, while charges and commissions are well flagged. Furthermore, minimum standards are being imposed via CAT marks and the stakeholder pension rules.

Little of this exists in the with-profits sector. Charging continues to be heavily front-end loaded in most with-profits policies, life companies regularly chop and change the penalties for early surrender and there is no obligation on life funds to publish any kind of independent assessment of their ability to meet policyholders' reasonable expectations. Indeed, one of the reasons why this form of saving continues to be so popular may be that most life companies still pay very favourable commissions to IFAs for selling with-profits products. Mr Sandler's review is long overdue and, if nothing else, should help galvanise the industry into much needed reform.

NTL resurgent

Barclay Knapp, president and chief executive of NTL, seems to have the staying power of an ox. Only last week the cable guy seemed to be all but down and out, but yesterday he was back off the canvass again with a strong set of figures and an even stronger set of forecasts. "Congratulations to the team on yet another quarter of flawless execution," he said in a statement.

The pep talk didn't end there, either. With the British cable industry, the usual habit is to push the forecast breakeven point ever further into the future with each successive announcement and hope that nobody notices. Profitability? Why, it's just beyond that hill there. Did we say that hill? Well, actually we meant a couple of hills beyond that. Are we really here already? Maybe if we merge with so and so we might just get there a thousand years from now. You get the picture. UK cable is one of those industries sustained entirely on hope, and it wouldn't otherwise exist at all.

There was none of that nonsense from NTL yesterday. Mr Knapp proudly announced that breakeven is going to be reached by – er – the end of the year after next. That might seem a long time to you and me, but it is actually a year earlier than most people had thought. Impressed? OK, so anyone can pluck a date out of the air. It's hard enough to forecast from one week to the next, let alone two-and-a-half years into the future, and to stand any chance at all of meeting it, all of Mr Knapp's flawless execution and some will be required.

In theory, there's an excellent business in NTL just dying to get out. Cable can offer both telephony and multi-channel TV, giving it a powerful natural advantage over Sky. It can also offer a better return path, making its interactive, broadband capabilities both better and cheaper than satellite. As for BT's ageing, legacy networks, they cannot even come close. But, boy, has it been a struggle convincing anyone of it.

Britain's cable industry is good at digging up the roads and raising debt to pay for it, but it's traditionally been useless at selling the service and even worse at after sales care. Both NTL and Telewest claim that's last year's story, and to be fair there is now clear evidence of a strongly rising revenue stream. None the less, the position is still perilous in the extreme, and shareholders will have to pray that Mr Knapp can continue to keep the bankers and bondholders at bay.

j.warner@independent.co.uk