[an error occurred while processing this directive]
BBC News
watch One-Minute World News
Last Updated: Wednesday, 20 August, 2003, 09:58 GMT 10:58 UK
With-profits industry in 'terminal decline'
Piggy bank
Many people have seen their savings dwindle

The government must take urgent action to avert a "national nightmare" for millions of pensions and endowment savers, an industry commentator has warned.

John Chapman, a former senior official at the Office of Fair Trading, said the with-profits industry was slipping into "terminal decline" - and it was time for the regulator and government to step in.

In an interview with Money Management magazine, he said uncertainties were compounded by secrecy in the industry, and lack of transparency in the way the funds were administered.

Mr Chapman suggests "an orderly run down of with profits operations is required", a task that the "government, industry and the regulators should address now".

With-profits woes

With-profits funds are supposed to smooth out the peaks and troughs of the stock market by storing up investment returns made in the good years in order to pay out to investors in the form of bonuses when markets suffer a downturn.

However, three years of sustained stock market falls have meant that many with-profit funds have cut payouts to investors and introduced swingeing penalties for those looking to move their money elsewhere.

An orderly run down of with profits operations is required - a task that the government, the industry and the regulators should address now
John Chapman

An increasing number of companies, such as Equitable Life, Royal & Sun Alliance, Pearl and NPI have closed their with-profits funds in recent years.

Many more companies have slashed bonuses, which are essential for investor returns on with-profits policies.

One of the major problems for the estimated 20m with-profits investors, of which half are estimated to be endowment holders, is that it is very difficult for consumers to retain any sense of ownership over their investment.

"Because of the requirement for "smoothing returns, companies can hide behind their veil of secrecy, effectively paying out whatever they like to policyholders - with very little rhyme or reason", he said

With the "majority of its attractions" now eroded, he said it was "clearly now an industry in terminal decline."

Mr Chapman estimates that stock markets would need to rise by more than 20% a year in order to maintain payments - an increase most commentators recognise as unrealistic in the current economic conditions.

"In order to ensure that the many millions of policyholders are treated fairly, an orderly run down of with profits operations is required - a task that the government, the industry and the regulators should address now."

The Financial Services Authority said it was working with the industry to improve transparency, but had no plans to intervene.


SEE ALSO:
More with-profits woe
16 Jul 03  |  Business


RELATED INTERNET LINKS:
The BBC is not responsible for the content of external internet sites


PRODUCTS AND SERVICES

News Front Page | Africa | Americas | Asia-Pacific | Europe | Middle East | South Asia
UK | Business | Entertainment | Science/Nature | Technology | Health
Have Your Say | In Pictures | Week at a Glance | Country Profiles | In Depth | Programmes
Americas Africa Europe Middle East South Asia Asia Pacific