3. "The root cause of the problems"
We have had personal pensions then stakeholder pensions and we will soon have Sandler products. When products are found to be inadequate there is a "reform" and new "products" are introduced. Such new "products" are described by the government in glowing terms such as: "portable", "simple", "comprehensible", "low-cost". Other adjectives used elsewhere are "flawed" x "pipedream" x Sandler products are presented as a reform in the Sandler Review which says:
"The root cause of the problems in the retail savings industry is consumer weakness." (10.89)
"The root causes of consumer weakness" (3.20) is discussed in Chapter Three in the Review and is "products". They are too complicated "compound consumer confusion" (3.13).
"Competitive force in the long-term savings industry actually drive towards greater complexity, not simplicity, of products. ... The heart of the solution lies in product regulation." (126)
The Review therefore proposes "the introduction of a suite of simple and comprehensible products" (10.12). But these "products" do not solve the systemic problems of the industry, such as:
1. One-sided
Professionals are doing business with amateurs and organisations are doing business with individuals.
2. Unstable
Companies are taken over by other companies or for example may demutualise. This instability affects both policyholders and employees of the industry.
"It really can be quite difficult to figure out who really 'owns' your pension." x
A unit trust may amalgamate with another unit trust or change into an OEIC. The rules can change for existing contracts:
"The providers can and do change the rules-in-play as it suits them. Again you can't do anything to guard against such things and you can't give it up as a bad job and recover your funds." x
Savings become trapped in closed funds x x and "products" such as: with-profits annuities, x with-profits bonds, x There is an article by Claire Francis in today's Sunday Times (10th October 2004) about personal pensions Millions are trapped in rip-off pensions, x and for example:
"They talk about the reason for having a personal pension is because you can take it anywhere. Well, my money's stuck somewhere and it's not doing anything." x
It is stuck with Pearl who were taken over by AMP. The business has recently been sold on to Hugh Osmond the pubs and pizzas entrepreneur. x This is a peripatetic pension rather than a portable pension. The Treasury Select Committee commented:
"We have asked several experts and the FSA if they can think of any other industry that sells its customers one product, such as an equity based with-profits endowment policy, and then unilaterally switches the customer into another product, such as a bond-oriented closed fund. ... The insurance industry seems to be unique in preserving to itself the right to sell a customer one product and then substitute it with another product which is inferior in key respects." x
Martin Wolf in the Financial Times describes this as:
"A confidence trick known as 'bait and switch': offer something attractive and then switch it for something else when the customer comes to collect." x
An "informed choice" of "products" is to a large extent not possible because they change after the time of sale in ways which are unpredictable:
"I thought my fund would accrue tax-free until Brown's ACT bombshell and now the minimum age of retirement is to be raised to 55. Once your money's in a pension fund you're a sitting duck with no escape from the avaricious whims or social engineering schemes dreamed up by a meddling politician." x
3. Conflicts of interest
There are various conflicts of interest. There is a conflict of interest between people seeking a good return on their investments, and an industry which benefits from imposing charges which reduce this return. There is a conflict interest between policyholders and business as in the case of Equitable Life guaranteed annuity rate (GAR) policies:
"This is a mutual and the idea of a GAR was ultra vires, the directors may have thought it looked good from the point of the business, BUT, that is not the prime objective of a mutual. The prime objective lies within the meaning of the word mutual, it has to benefit all policy holders." x x x
There may be a conflict of interest between existing policyholders, and people who are not yet policyholders. It may be to the advantage of existing policyholders for a life assurance company to recruit new policyholders but not to the advantage of the people who become new policyholders. Someone might regret that they bought a policy with the result that it lapses. x
4. The FSA is controlled by the industry
De jure the FSA is controlled by Treasury, but because of the complexity of the industry it is de facto controlled by the industry by whom it is financed. It is not part of the civil service and it is not "acting on behalf of the Crown". It is a continuation the system of self-regulation, consisting of the Securities and Investments Board (SIB) and Self-Regulating Organisations (SROs). The FSA is an amalgamation of the SIB and SROs. It describes itself as the SIB renamed. x A former chairman of the SIB, Sir Andrew Large, is currently on the board of the FSA.
The Sandler Review contains some good proposals for investors, in particular abolishing the 5 per cent withdrawal rule (96). But whether they are adopted depends largely on the support of the FSA which is controlled by the industry.