Shake-up aims to give investors low cost simplicity

Savings Review: Government-backed investigation found a plethora of different charges which bore no relation to performance whatsoever

Pensions and investments must become much simpler and more readily available and their charges and other hidden fees must be brought into the open or stamped out altogether, in a bid to encourage individuals to save more and to make financial services companies clean up their act.

This is Ron Sandler's vision for the future and comes after the former Lloyd's of London chief executive was asked by the Government to scrutinise every nook of the life and pensions industry to identify its shortcomings and suggest ways to improve it.

The result, a 220-page report unveiled yesterday, is what he proclaimed is an "agenda of formidable challenge" for an industry he believes is riddled with "complexity and opacity".

These problems, Mr Sandler has found, have led to high levels of consumer confusion and distrust of providers which have discouraged them from investing. This has created a shortfall every year of £27bn between what people should be putting away for old age and what they really are saving.

Mr Sandler also claims the complexity in the market has prevented "Darwinian forces" from operating, so that poorly performing companies have hung on for much longer than they should because they can support themselves by levying high charges from consumers.

The Government has tried to address these problems by introducing products it thinks are ultra safe such as price-capped stakeholder pensions and CAT-marked investments.

The initiatives have had only limited success, which Mr Sandler attributes to them not going far enough. Instead Mr Sandler favours a three-pronged attack, shaking up product regulation, financial advice and the tax regime.

His most headline-grabbing suggestion is to bring in simple vehicles, which he has styled as "stakeholder" products after the pensions already on the market, which would have capped charges and a restricted range of investments. The idea is that they would be so fool-proof that they would not need to be sold by financial advisers and could be bought off the shelf – literally – anywhere from banks to supermarkets.

Unsurprisingly, the life and pensions industry – whose co-operation will be crucial if Mr Sandler's ideas are to get off the ground – rejected suggestions their market is not competitive, but gave a cautious welcome to his aim to boost the overall level of individuals' investment.

Jonathan Bloomer, chief executive of Prudential, one of the companies which has spent millions launching low-cost stakeholders and other low-margin products in the last couple of years, observed: "The market is looking very competitive from where I am sitting." Most heads of Britain's largest insurance companies would no doubt agree.

But they concede that Mr Sandler does have a point about certain areas of the market, most notably the with-profits contracts that dominate the life assurance industry.

Mr Bloomer said: "There have been aspects of life funds which have meant there haven't been pressures on costs. A move towards more transparency will create that."

Publicly, companies are upbeat about Mr Sandler's proposals for with-profits. These are that if companies want their offerings to come under the new "stakeholder" banner, they will have to separate funds which belong to shareholders and funds belonging to policyholders to remove possible conflicts of interest.

Mr Sandler also wants policyholders to receive more information about the underlying performance of the fund so that they can judge whether they are receiving a fair amount in bonuses. Some insurers have already introduced these reforms, but, as Mr Sandler is aware, others will have a long way to go.

Providers are more cautious about Mr Sandler's proposal for a basket of "stakeholder" products. The Government has already dabbled with upper limits on fees when it decreed that stakeholder pensions could be charged at a maximum of 1 per cent, despite opposition from the industry.

Insurers found this difficult to deliver, particularly to the group of low-income savers that stakeholders were meant to target, and most have quietly deserted this part of the market. Mr Sandler said: "Stakeholder pensions are subject to two sets of regulation – of the product and the sales process. This has created considerable costs for providers and made it very difficult to deliver to people with only modest amounts to save."

He stresses that his stakeholder regime would be different because only the product would be regulated.

Industry figures acknowledge that this would be more economic. David Prosser, chief executive of Legal & General, said: "A safe product with a simpler distribution system means more sales at the same price – it is a simple equation."

But others stress that the price cap which will be attached to the range of "safe haven" products, which could be more or less than the current 1 per cent on stakeholder pensions, is key to whether they are successful. Philip Scott, head of the life division at Norwich Union, said: "The current 1 per cent is an arbitrary figure and has had the perverse effect of making most providers concentrate on higher value customers. The new cap will have to be set at a level that can work."

There were mixed views as to whether Mr Sandler's proposals, which fall short of advocating compulsory saving, would put a dint in the savings gap. Oliver Wyman, the financial consultants that first identified the £27bn blackhole, predicted the suggestions would boost saving by £5bn "at least" by 2005. Richard Surface, head of insurance, said: "These products will be attractive to direct salesforces, which are being killed off by companies. They will also naturally fall into the remit of what 'sales agents' in banks could sell along with mortgages and loans."

A new regime based on Mr Sandler's ideas may not have to mean the complete annihilation of independent financial advisers from the market for all but the super rich. Mr Surface suggested a scenario in which IFAs still training for their full qualifications – which Mr Sandler suggests should be beefed up – could in the meantime sell the simple "stakeholder" products for much lower fees.

But there is considerable scepticism that anything short of compulsory pensions contributions or drastic increases to tax incentives will close the savings gap. Mr Sandler said confusing tax rules around pensions and investments should be simplified, but suggested tax incentives themselves do not encourage people to save.

Mary Francis, director general of the Association of British Insurers, challenged this, saying: "Mr Sandler has proposed a secure framework but we need to breathe some life into it. Information and advice are useful but our research shows that financial incentives are important which is why we favour tax credits going to employers who are contributing to employees' pension schemes."

On pension compulsion, Mr Sandler was more ambiguous. He asserted that the difficult issue was not within his remit, but added that he hoped the Government would enter into a more "thorough and thoughtful" debate on the subject. This might be kick started by Alan Pickering, the Government's pension adviser, who will present his report tomorrow.

The Government rushed out a glowing response to Mr Sandler's general findings, saying it would start consultation immediately on how to bring them about. But it was silent on compulsion as it seems it has yet to decide whether to reform the existing regime or entirely re-write its policy on how society provides for its old age.