Cost of policies surges in spite of new rules

The cost of mortgage-related endowment policies and pensions sold to hundreds of thousands of people rose by up to 17 per cent last year, despite new rules forcing insurers to disclose their charges to investors in full, a survey showed yesterday.

Some of Britain's biggest household name companies, including Prudential, Guardian Royal Exchange (GRE) and Sun Alliance, strip away between 4 and 8 per cent each year in charges on 10-year pension policies. The average figure is 3.9 per cent.

The results contradicts claims two years ago by the Securities and Investments Board, the industry's leading regulator, that a new disclosure regime of company charges and expenses would deliver savings of pounds 1bn a year to investors. At least pounds 500m of that amount would come through reductions in commissions paid to salespeople, the SIB suggested.

Heavy charging structures mean that, taking today's 2.9 per cent underlying inflation levels into account, investment returns on these funds would have to reach at least 7 per cent each year simply to stand still in real value terms.

In the case of GRE's financial services offshoot, Guardian Financial, its annual charges of 8.1 per cent mean returns on a 10-year with-profits personal pension would have to be at least 11 per cent every year simply for a policyholder not to lose any money.

The figures were revealed yesterday a survey by Money Marketing, a financial services magazine, of with-profits policies sold by 35 of Britain's top insurance companies.

John Jenkins, an actuary and principal consultant at KPMG, the chartered accountancy firm which carried out the survey, said yesterday that the averages published yesterday may be even higher.

This was because in a number of cases, companies did not supply their 1994 figures and KPMG had to use lower ones in force the previous year. Mr Jenkins also predicted that a survey of more popular unit-linked policies, due later this year, was likely to show the same upward trend.

He said: "I can only think that what some offices have found is that their sales have been falling in the past year. If they have fixed costs, the eggect is likely to push prives up for new policyholders.

"It is getting to the stage where the amount of charges on a policy are higher than the the yield from equities.

"If that is the case, it cannot be best advice for financial advisers to recommend that their clients buy some of these policies, particularly those with heavy charges. They should be addressed towards cheaper unit trusts, Tessas and personal equity plans."

One financial adviser, who refused to be named, said yesterday: "The fact is that commissions have risen massively in the past few years. Large national brokers and networks use their financial muscle with life companies to force up commission rates by up to 30 or 40 per cent over the standard rate by promising to sell in volume.

Money Marketing's survey shows that the Reduction In Yield - or average annual charges - levied on 10-year endowments sold last year was 3.2 per cent, up from 3 per cent in 1994.

For 25-year pensions, annual charges ranged between the 0.8 per cent charged by Equitable Life and Guardian Financial's 8.1 per cent. Royal Insurance levied an annual charge of 4.8 per cent on policyholders' funds, while Sun Alliance with which it is about to merge, charged 5 per cent.

For 25-year pensions, the average charge dropped to 1.8 per cent. But Guardian Financial levied an annual fee of 4.7 per cent, while the Pru took 2.5 per cent, like the Royal.

The Securities and Invest-ments Board said it remained convinced that the benefits to policyholders of product disclosure will express themselves over the next 10 years.

Comment, page 19