Insurers still refuse to reduce charges

Rules designed to give savers a bonanza of at least pounds 1bn a year by forcing insurance companies to disclose charges they impose on their products have yielded hardly any benefits, according to a new survey by the Personal Investment Authority.

Despite hopes of a price war in the wake of the new disclosure regime being introduced in 1995, most companies charge as much on their policies as last year, the PIA report admitted.

While the average charges imposed by all insurers dropped by 3.9 per cent across the board compared to 12 months ago, this was accounted for mostly by uncompetitive companies whose products are among the least successful commercially.

The vast majority, including Commercial Union, Norwich Union and NPI, have not lowered their charges in the past year.

The report, the second to be issued by the PIA, mirrors last year's findings, which showed similar numbers of firms had not cut the costs of the products they sell.

It deals a critical blow to claims made three years ago by the Securities and Investments Board, the City regulator, that the competition unleashed by the new regime it had originally devised, would give savings to investors of at least pounds 1bn a year.

Several of the more competitive firms until last year, including Allied Dunbar and many Scottish life insurers, have taken advantage of the new disclosure regime to raise their charges to match their rivals.

Joe Palmer, chairman of the PIA, said in the report: "Although the full impact of the disclosure regime may only fully emerge over time, we still consider this information to be an important part of the PIA's accountability to investors.

The PIA survey, published yesterday, comes amid increasing consumer dissatisfaction with the high charges levied by insurers on their products, including personal pensions.

Harriet Hall, legal officer at the National Consumer Council, said: "A lot of people find the terms used, such as `reduction in yield', difficult to understand.

"The purpose of disclosure was to attempt to get competition going. This now needs careful monitoring to ensure competition does take place."

Ms Hall, however, welcomed the publication of the disclosure document, which she said offered consumers an opportunity to make more informed choices.

The figures also indicate that where companies had the chance to sell their products across several distribution channels, at least one of which was cheaper, they made no attempt to reflect this in the costs imposed on consumers.

Among the firms which have refused to differentiate between the channels selling their pension products are Axa Equity & Law, Clerical Medical, Norwich Union, which is to float on the stock market later this year, and Sun Alliance, now merged with Royal Insurance.

The PIA yesterday refused to comment publicly on this new evidence. But it is understood that the regulator is growing increasingly concerned at the unwillingness of companies to compete within the new climate offered by the disclosure rules introduced under its chief executive Colette Bowe two years ago.

It also broke with past policy by publicly acknowledging for the first time that some companies, particularly those who still collect premiums door-to-door, can only achieve vaguely generous maturity payouts to the handful of policyholders who get that far by penalising the vast majority who halt their contributions early.

The report shows that independent financial advisers (IFAs) show little or no bias towards companies which pay higher commission. Most opted for firms paying the same amount of remuneration. Unlike direct salesforces, growing numbers of IFAs are prepared to rebate some of their commission back to their clients.

But their choice of pension providers varied wildly, including companies where charges in the first five years ranged between pounds 1,000 and pounds 2,000. Charges - and the fact that many of them are levied in the first few years of a policy - can take up to 40 per cent of a fund's value.

Reliance Mutual, one of the companies named in the report, charges an average of 2.8 per cent each year over the 25-year lifetime of a fund.

Assuming contributions of pounds 60 a month and investment growth of 9 per cent, the value of a fund without any charges at all might reach almost pounds 5,500. The effect of Reliance Mutual's charges in the first five years is to take up to pounds 2,020 from the personal pension.

By contrast, others, including Equitable Life, which has a "reduction in yield" of 0.9 per cent a year over the lifetime of the same policy, will take pounds 283 out.

Table compiled by Nabila Zar

Personal pensions - how much the big insurers charge

25 Year Unit Linked Personal Pensions, monthly premiums of pounds 60 (assumes annual growth of 9 per cent)

5-year effect of deductions (pounds ) 1996

maturity reduction in yield - 1996 (%)

5-year effect of deductions (pounds ) - 1995

maturity reduction in yield 1995

AbbeyLife 1,940 2.1 1,900 2.1

Abbey National Life 1,200 1.8 1,400 1.8

Albany Life 2,030 2.0 2,053 1.9

Allied Dunbar 1,730 1.8 1,780 1.7

AXA Equity & Law 1,610 2.2 1,610 2.2

Barclays Life 1,120 1.8 1,130 1.8

Black Horse Life 1,500 1.9 1,500 1.9

Britannia Life 1,777 1.9 1,770 1.9

Britannic Assurance 1,250 1.8 1,250 (WP) 1.8 (WP)

Canada Life 1,580 2.1 1,580 2.1

Clerical Medical & General 1,610 2.2 1,610 2.2

Colonial Mutual 1,590 2.1 1,760 2.2

Commercial Union 1,320 1.8 1,320 1.8

Cornhill 1,900 1.4 1,900 1.4

Cooperative Insurance Society 1,270 (WP) 1.2 (WP) 1,340 (WP) 1.2 (WP)

Eagle Star Life 1,820 1.7 1,290 1.7

Equitable Life 283 0.9 284 0.9

Friends Provident 1,160 1.6 1,170 1.9

General Accident Life 1,280 1.9 1,280 1.8

Guardian Financial Service 1,570 1.9 1,110 4

Legal & General 1,640 1.5 1,640 1.8

Lincoln National 1,780 1.9 1,800 1.9

London and Manchester Assurance 1,640 2.2 1,680 (WP) 2.9(WP)

Midland Life 1,040 1.8 1,040 1.8

National Mutual Life 1,210 1.5 1,110 1.3

National Provident Institution (NPI) 1,080 1.8 1,080 1.8

NatWest Life 1,110 1.9 1,200 2.0

Nationwide Life 1,360 1.8 n.a. n.a.

Norwich Union 1,400 1.6 1,400 1.6

Pearl 1,350 (WP) 2.3 (WP) 1,430 2.6

Refuge Life 1,400 2.5 1,400 2.5

Reliance Mutual 2,020 2.8 2,000 2.7

Royal Life 1,430 1.5 n.a. n.a.

Scottish Amicable 1,270 1.8 1,200 1.7

Scottish Equitable 1,600 1.6 1,600 1.6

Scottish Life 1,410 1.8 1,334 1.6

Scottish Mutual 1,020 2.1 931 2.2

Scottish Provident 1,370 2.1 1,370 2.1

Scottish Widows 621 1.8 616 1.7

Skandia Life 1,890 1.8 1,880 1.8

Standard Life 746 1.9 746 1.9

Sun Alliance 797 1.9 713 1.8

Sun Life 1,670 2.0 1,650 1.9

Sun Life of Canada 1,460 1.8 1,770 2.7

TSB Life & Pensions 505 1.8 505 1.8

Where charges for unit-linked personal pensions have not been available, those for with-profits products (WP) are used, as indicated. Where different charges are levied by companies, the cheapest have been used. Reduction in yield is the average annual fall in the value of a policy after company charges and commission have been paid.