Prudent to the last

The trade in pre-paid funeral plans is now worth pounds 150m. It theref ore comes as some surprise that the industry is unregulated. Eric Spencer looks into its coffers

Making sure there is enough money left to pay for a good funeral is one of humanity's oldest needs, and most people prefer to make their own arrangements rather than leave it in the lap of a sorrowing relative. So anyone thinking of arranging and paying for their funeral in advance using a pre-paid funeral plan should have been reassured by recent proposals from the Department of Trade and Industry for increased regulation of the industry.

Welcome though the proposals are, doubts remain over whether they will, by themselves, provide the level of protection that plan-buyers need.

The idea behind these plans is simple. You choose the funeral you want and pay for it now. Costs average around pounds 1,000, but can be higher depending on the ceremony you choose. Your money is held in trust until you die, and then a reputable local funeral director carries out your wishes.

The plans offer the convenience of having all the arrangements made and paid for in advance, taking the pressure off relatives and freeing plan- holders from any worry over how their funerals will be conducted. But concerns were first raised two years ago when two small plan providers collapsed, taking plan-holders' money with them.

In the event, no one lost out because the larger players in the industry voluntarily stepped in. Subsequently, the Office of Fair Trading investigated and found to its surprise that although this is a rapidly growing industry, with around 150,000 plans outstanding, worth a total of pounds 150m, it is completely unregulated.

The OFT's estimate was that there could be as much as pounds 500m tied up in funeral plans by the year 2000, and although it acknowledged that these plans cannot be seen as investments alongside, say, unit or investment trusts, it made a strong recommendation that there should be statutory provisions to safeguard plan-holders' money.

The DTI has responded with proposals aimed at ensuring that providers place plan-holders' money in a properly constituted trust. The department also suggests that the industry establishes a compensation scheme to protect automatically all customers whose providers do fail. But the proposals say that legislation to back these measures would be costly and inflexible. Officials believe that a system of self-regulation relying on trade associations would be adequate to ensure the public is protected.

But this won't be enough. As things stand, the DTI cannot prevent companies following a code of conduct set by their trade association one day, and leaving the next. Without statutory regulation to oblige firms either to be members of an approved association with a satisfactory code of conduct, or to adopt a national code approved by the Government, the protection is simply not there.

Responses to the DTI proposals are due in by November 15, and the main players hope to work closely with the Government in making sure that effective legislation is put into place. But in the meantime, how can someone thinking of buying a plan be sure that their money is safe and they will get the funeral they want?

The most important thing to check is that plan-holders' money is put into a trust, which should be managed by named, reputable trustees; it should be valued annually by an actuary to make sure it can cover the likely future cost of the funerals; there should be safeguards to make sure payments from the trust are appropriate, and the funds should be held separate from the firm administering the plan or providing the funeral.

The primary aim of the trust may be to preserve the value of the money you have put in, so there's enough to pay for a funeral when the time comes. This requires a conservative attitude to investment, perhaps relying mainly on index-linked gilts with a few blue-chip securities to provide a safety margin.

Funeral costs fall into two parts. There's the basic funeral directors' service, usually including coffin, care of the body, hearse, pallbearers and so-on. On top of this there are disbursements: these are expenses such as church fees, the cost of flowers, crematorium or cemetery fees, and doctors' fees.

With a well-run trust you can be sure that the basic cost of a funeral will be covered. The problem is that unless the trustees are prepared to adopt a riskier investment strategy, the fund can't offer a long-term guarantee to cover the cost of the funeral and the disbursements as well. Over the past five years, the average cost of disbursements has risen by around 70 per cent, compared with general inflation of 17 per cent.

Any funeral plan-that carries a guarantee that it will cover all disbursements, as well as the basic cost of the funeral, will have to choose between demanding a very high rate of return on its investment or asking plan- holders for a sum large enough to be sure of meeting disbursement costs.

You should make sure you are comfortable with the assumptions underlying the plan-you have chosen. And if you change your mind, you should be able to get your money back, in full, with no questions asked.

The main points of the OFT's recommendations have been adopted by the National Association for Pre-paid Funeral Plans, the largest of the two trade bodies for plan-providers. Its code of practice requires its members to meet all the financial concerns outlined above, sets out clear service standards, and provides a conciliation service through the Chartered Institute of Arbitrators.

The writer is chief executive of Funeral Plans Limited.