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Tuesday, 9 July, 2002, 11:55 GMT 12:55 UK
Q&A: The Sandler review
The Sandler review of the UK financial services industry calls for sweeping reforms aimed at encouraging consumers to save more for their retirement.

BBC News Online takes a closer look at the background to the report, and weighs up its recommendations.

What is the review supposed to achieve?

The review, led by former Lloyds of London chief Ron Sandler, was commissioned by the Treasury in June last year amid growing concern over consumers' apparent reluctance to save for their retirement.

It was intended to identify structural flaws in the financial services industry which might be deterring consumers from saving, and set out proposed remedies.

It is hoped that the report will lead to reforms which will encourage consumers to plug the estimated 28bn ($43.3bn) savings gap - the difference between what people are actually saving and what they need to save to be sure of an adequate retirement income.

Launch new window : The Sandler report
Click here for a guide to some of the key points.

The Sandler review was also designed to restore consumer confidence which was battered by the pensions misselling scandal of the 1980s and early 90s.

The misselling crisis began in 1994 when it emerged that many consumers, acting on flawed advice from salesmen, had swapped their occupational schemes for private policies which left them worse off.

So what flaws has the review identified?

In a nutshell, the report says that existing pensions products are far too complex, leading many consumers to inadvertently buy policies which carry excessive charges or offer relatively poor returns.

It acknowledges that this is partly because of consumer ignorance, but lays a fair proportion of the blame at the door of the financial advice industry which acts as an intermediary between savers and pensions providers.

Since most pensions are sold through advisers, who usually earn a commission on the sale, pension providers tend to tailor their products for advisers rather than consumers, the report adds.

This means that the savings market is unresponsive to consumer needs, and tends towards ever-greater levels of complexity.

What remedies does the report propose?

The report's core recommendation is the introduction of a new range of easy-to-understand products which would be sold directly to consumers under a specific brand name.

Charges and exit penalties levied under the new products would be strictly limited in number and scope in an effort to make them as transparent as possible.

The review also recommends a radical shake-up of 'with profits' pension policies.

With profits policies, which average out stock market returns over a number of years, are widely seen as the most opaque products on the market.

The Sandler report says that the process by which annual returns are calculated should be made clearer.

Controversially, it says the practice of giving 10% of with profits returns to providers' shareholders - in return for their willingness to inject cash into the pension fund if necessary - should be scrapped.

It says the 10% figure is an arbitrary one, unrelated to the level of risk that shareholders' cash will actually be needed.

And it argues that splitting returns in this way makes it even harder for savers to assess their fund's performance.

Analysts believe that this could penalise publicly quoted insurers, whose profit structure often depends heavily on returns from with-profits policies.

The report also takes aim at financial advisers.

It suggests that advisers should be paid hourly fees rather than commissions on sales so as to reduce the likelihood of bias creeping into supposedly independent advice.

It adds that there are signs that many advisers could do with a refresher course on investment fundamentals.

Who wins and who loses?

The Sandler recommendations, if implemented, would probably make buying a pension cheaper and easier to understand.

This is likely to benefit younger and less well-off workers, those who are currently least likely to save.

The Consumer's Association has warmly endorsed the Sandler review, saying that it has "correctly diagnosed the fundamental failings of the financial services industry."

The effect of the proposals on pension providers is less clear.

So far, pension groups have given the Sandler report a cautious welcome.

But some analysts believe its recommendations could put some insurers and pension providers, already battered by dwindling stock market returns, under added pressure.

What happens next?

The Treasury and stock market regulators are due to start weighing up the Sandler review in September.

They are expected to put forward initial proposals based on the report next year.

In the meantime, a second eagerly awaited review of the pensions industry - conducted this time by former National Association Pension Funds chief Alan Pickering - is expected on Thursday.

That report is expected to recommend legal changes aimed at shoring up generous 'final salary' schemes paid by occupational pensions.

The recent suspension of many final salary schemes is thought to have further undermined consumer confidence in the pensions industry.


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