Outlook: Sky's Ball goes to heart of the debate on Charter renewal

Without profits

Tony Ball, chief executive of BSkyB, has always had a healthy disregard for the BBC and the privileged position it occupies in British broadcasting. Yet with the virtual demise of ITV, which is only now struggling off the critical list, there was evidence of the two settling into a cosy co-habitation, with Sky dominating pay TV and the Beeb the free-to-air arena. With Freeview, they even went into business together.

Well, in the end everyone's true colours come shining through and if there ever was a peace between the two, it was well and truly shatteredyesterday as Mr Ball crashed his way into the debate on Charter renewal. Mr Ball is a hard-nosed businessman with a commercial agenda to pursue. Anything that in the long run weakens the BBC must ultimately be good for him as the most powerful other force in the British broadcasting market.

So his remarks, in the James MacTaggart memorial lecture at the Edinburgh television festival last night, should probably be taken with a pinch of salt. Perhaps surprisingly, I none the less find myself in agreement with most of what he said.

The problem with the BBC is not so much whether people think they are getting value for money out of the licence fee. Indeed, the survey Mr Ball cites suggesting that more than half of licence fee payers don't think they are is a complete irrelevance: £116 a year is neither here nor there, even for low income earners, and set against the other taxes we pay every year and whether they represent value for money, it is scarcely worth debating at all.

No, the difficulty arises because although individually the licence fee is a small sum of money, aggregated across the country as a whole it adds up to an awful lot, and that creates a distortion in the market that wouldn't be tolerated in any other industry. Mr Ball's argument is not that all public service broadcasting should go. Indeed he freely admits that commercial and subscription TV is incapable of producing all the quality TV the public needs.

Mr Ball's quarrel is rather with the amount of public service TV. Is it really legitimate, for instance, for the BBC to be spending very substantial quantities of licence fee money on buying American programming? Few would argue such expenditure is a good use of licence-fee money, yet it is what the BBC deems necessary to maintain its mass audiences and thereby safeguard its raison d'être.

The BBC is already far too big, and is intent only on getting bigger still. New channels seem to tumble off the production line almost by the day, regardless of whether the public want them, as the leviathan attempts to hog the airwaves with its output. In the process it crowds out everyone else, stifling market-driven forms of innovation and creativity as it goes. Mr Ball may have a commercial axe to grind, but he's gone right to the heart of the debate about the future of the BBC. Do we want our broadcasting to continue to be centrally directed by those who think they know better than us what we want, or do we wish to make our own choices? I know where my preference lies.

Without profits

Anyone Would think the with-profits life assurance industry was in its final death throes to judge by the headlines this week. Yet while the industry undoubtedly faces a period of shrinkage, and urgently needs to modernise itself to meet the challenges of today's low-return investment environment, it would be premature to assign it to the dustbin of history just yet.

The latest outbreak of life company bashing was prompted by an article in Money Management by John Chapman, a former Office of Fair Trading official. Mr Chapman has been a leading critic of the industry for many years now, and his research has been instrumental in demonstrating the industry's many iniquities. No other consumer product could be sold in such a cavalier or opaque fashion. Mr Chapman is one of the few to have lifted the bonnet and taken the time fully to understand and analyse what lies beneath. His findings make disturbing reading.

According to Mr Chapman, policyholders "face grim prospects with continually falling payouts". Particularly concerning is the fate of policyholders in "closed" funds, which have given up trying to sell new policies and where there is consequently no incentive or capital to achieve a decent rate of return.

As the fund shrinks in size, there are ever fewer policyholders to meet the administrative costs, which will eventually eat up any profits earned. The great bulk of these closed funds added nothing in the way of bonuses to policies last year, yet there are big penalties for policyholders who attempt to salvage their money before the assigned maturity date. In practice they have become locked into a nil return investment fund.

Despite this, and despite three horrific years of broken promises and calamitous performance, with-profits has defied its detractors to remain an extraordinarily popular form of investment product. It's hard to believe for an industry which richly deserves a total collapse in public trust, but there are even signs of a resumption of growth.

According to figures from the Association of British Insurers yesterday, new regular savings rose 20 per cent in the second quarter while new pension business was at its highest level for more than a year. Not all of this will be "with-profits" business, but it appears that quite a lot of it is. Last year, sales of new with-profits policies represented a quarter of all new life and pensions business.

You might have thought that the entire industry is closing up shop, for that's the impression the headlines give, but actually only 25 per cent of total with-profits money, or about £100bn in all, is held in closed funds. That's a big number, and if you happen to be part of it, you need to take advice on whether it's worth staying in. As for the rest, there's no doubt that performance won't anywhere near match inflated expectations. On the other hand, it is unlikely to be any worse than the alternatives.

One of the reasons why withprofits products still sell is that they continue to be marketed on the basis of past performance. According to Money Marketing, the average annual return on a 25-year endowment policy maturing this year is 6.6 per cent above the rate of inflation, which is a very acceptable result.

The problem is that from here on in, rates of return will decline markedly as fewer of the good years in performance are included in maturity values and more of the bad ones are. The life funds have been guilty not just of selling on the basis of over-optimistic assumptions; they have also been paying out too much in annual bonuses. As a result, we have the curious phenomenon of payouts for maturing policies in many funds still being above underlying asset shares. Many policyholders reaching maturity right now seem to be getting more than their fair share. Future generations will pay for this largesse with falling bonuses for some years to come, but then that's the way a smoothed, with-profits investment product is meant to work.

I don't want to apologise for an industry which fully deserves all the criticism it gets, but those investing in financially strong life funds will continue to enjoy rates of return which compare favourably to other forms of low-risk investment. They just won't be nearly as good as they were.

That said, one of the problems with this industry is that it's been secretive, opaque, complacent and condescending. The industry has operated like a cartel, and it has been largely a question of pot luck whether you are in a good fund or a bad one. It has been hard to tell which companies are performing well, which ones are overcharging and especially which ones are financially weak. Out of necessity, the industry is beginning to reform itself, but progress is painfully slow despite the kicking of the past three years. With-profits isn't yet dead as a way of saving, but it soon will be if it doesn't get a move on.