ABI warns against price cap on savings

Ministers have been warned not to impose price caps on its planned new savings products because they would act as a deterrent for people to save.

The warning came from the Association of British Insurers, which urged the Government to learn the lessons from its flagship stakeholder pension that was launched in April 2001.

Sales of the pension, which was designed to target low to middle-income savers and had a maximum charge of 1 per cent, have struggled to take off. The Government is now planning to introduce a new range of over-the-counter savings products that would also have a 1 per cent price cap.

The idea for the simple suite of products was put forward by Ron Sandler, who was commissioned by the Treasury to investigate the market for retail saving and investing. The deadline for responding to the Treasury's consultation paper on Mr Sandler's proposals passed this week.

Mary Francis, the director general of the ABI, said: "Competition, not prescription, is the best way of meeting customers' needs. But if we must have price controls, there should be sufficient headroom to pay for help, guidance and advice. Otherwise, as we've seen from stakeholder pensions, people in the target market, simply won't save."

The Treasury has commissioned an external review to investigate the effects of a 1 per cent price cap on take-up. The ABI believes 1 per cent is too low to allow insurance companies to market and sell the product to people who are reluctant to save.

It has suggested a new charging model, where customers would pay a fee on each contribution, in addition to the 1 per cent annual charge on the fund. The total fee would fall to 1 per cent a few years into the policy term.

However, consumer groups say the 1 per cent cap is good value for customers and insurance companies need to improve their services to become more efficient.