Something to hide

Insurers have ways of concealing the true costs of policies

The rules introduced last year to ensure that prospective policyholders are given details of charges they will have to pay are a tremendous improvement on what went one before.

But there is still considerable scope for simplifying the information and closing loopholes that allow some companies to hide the true costs of their policies.

One simple way in which companies do this is simply by not taking part in surveys aimed at comparing different charges. When Money Marketing published its recent survey on unit-linked investments, about 20 companies declined to supply the information requested of them.

Among them were AIG Life, Barclays Life, Century Life, Cornhill, Hill Samuel, Irish Life, London & Manchester, Mercury Asset Management and National & Provincial Life (now taken over by Abbey National).

Others were Refuge, Royal Liverpool, Sun Life of Canada and Teachers' Assurance, which has become entangled in disputes with many teachers who were wrongly advised to opt out of their occupational pensions and start private ones.

Some companies, like Barclays Life, said they did not have the resources to meet the survey's tight deadline. In some cases this rings true: Barclays has taken part in previous surveys. Others claim they did not sell the policies concerned any longer. This is also true, but policyholders might still want to know how their savings are performing.

There is, in any case, plenty of scope for massaging the figures, as with-profits policies, show. The supposed attraction of such policies lies in the fact that they "smooth" returns, so that bad performance years are offset by good. However, this makes it near-impossible to tell whether the estimated charges over the lifetime of a policy will be as stated.

This is because between 28 to 65 per cent of a maturity payout is the so-called "terminal bonus". The actual amount has been falling in real terms since the early 1990s.

Unit-linked policies also impose charges that can double the total initial charge from 5 or 6 per cent up to 12 per cent each year. This can be done in a variety of ways including "capital units", which amount to permanently heavier charges made on the first years' contributions.

Other novel cost structures include Scottish Equitable's "specific member charge", whereby extra fees are levied if contributions are halted or reduced during a policy's lifetime. Yet because of unemployment, divorce and the offer of alternative company pension schemes, 8 per cent of Scottish Equitable policyholders stop their payments every year. Hundreds more reduce their contributions.

Scottish Equitable also charges more if a person increases premiums, despite companies constantly urging their policyholders to do so to ensure a decent retirement pot.

Skandia Life operates a similar "contribution servicing charge" based on the principle of penalising policyholders who miss their payments.

Abbey Life, owned by Lloyds Bank, charges policyholders an extra 6 per cent if they stop premiums in the first year, reducing to 1 per cent by year six. By this point, as the actuarial firm AKG points out, most pension holders have stopped their contributions, usually for perfectly genuine reasons.

Sun Life gives policyholders an "extra fund injection" but only between eight and five years before retirement. This boost improves the value of the fund at retirement. It also allows Sun Life to project far lower annual management charges over the entire life of a contract. But given that only 13 per cent of all policies are still kept going after 20 years, the full Sun Life loyalty bonus is paid to one in seven policyholders. Everyone else pays extra.

A similar policy is adopted by Albany Life, owned by US insurer Metropolitan Life.