In its evidence to the Treasury Committee x the Consumers' Association states:
"8. However, we think the Government is making a massive strategic policy error on pension provision by pinning its hopes on applying a private sector retail market based solution to what is essentially a public policy issue (similar to health care or education)."
The Equitable Life Inquiry x discusses the history of Equitable Life:
"3. Until the early 1970s the Equitable Life was a relatively small, conservative life office serving a narrow market. The bulk of its business was generated by the FSSU, an endowment based scheme for university teachers that required little in the way of marketing and management, and was of its nature aimed at an intelligent and articulate clientele. This appears to have insulated the Society from general competitive pressures.
4. However, from the mid-1960s the Society was faced with the prospect of the loss of FSSU business ...
5. The Society elected to embark on active marketing, and adopted a series of strategies aim at increasing market penetration." (Part 7 x )
With disastrous consequences! This is the retail market model in action. When it was no longer insulated from competitive pressures by FSSU, to survive in the market, it resorted to practices discussed by Lord Penrose in his report. Callum McCarthy, Chairman of the FSA, says:
"The prospective benefit to its 1 million existing policyholders of a sale of the Equitable was bound to outweigh the prospective detriment to the 6,000 new policyholders who joined after the House of Lords verdict." (open letter to the Minister Ruth Kelly MP, on the FSA's website x )
This reflects a general problem with the retail market model. Even if a financial company such as Equitable Life is acting on behalf of its members, it is not acting on behalf of non-members. The employees are working directly for a company, such as Equitable Life, and only indirectly for customers. To stay in a job they need to gather in money by selling "products".
With such a likelihood of detriment after the House of Lords verdict, Equitable Life should not have recruited new policyholders. That is, had it been acting on behalf of non-members, it would not have recruited them to be members. (This does not only apply to people joining after the House of Lords judgement. x x )
Encouraging people to save, building trust in the market, promoting confidence in long-term saving and so on encourages stealing. For example:
"My company put in 5% of salary, I put in 5% of salary and the pension company took out 90% in charges." x
"Lurking in the small print were penalties known as market value reductions (MVR). These allow insurers to charge financial penalties at any time if investors wanted their capital back after stock market falls even if they had held the bonds for the full five years." x x
With the help of changes in the regulations by the FSA, charges, that is both management charges and expenses, x are increasingly taken out of capital rather than investment income.
The Treasury Committee has serious criticism of the financial industry in its reports such as that on endowment mortgages: x
"Urgent action is needed from the Government, the FSA and the industry to change a culture that has led to the multiple failures seen in the case of endowment mortages." (37)
The problem is the business model rather than "culture". What "urgent action"? How can this "change a culture"? "A culture which has led to the multiple failures" has not prevented the Committee welcoming the reward of the administration of Child Trust Funds to the industry. This promises to be highly lucrative. It quotes the Consumers' Association: x
"The Consumers' Association supported the concept of the Child Trust Fund 'as a means of building assets and encouraging greater savings amongst consumers ... '"
But the Consumers Association is not so enthusiastic about Child Trust Funds. For example in its evidence to the Committee it says:
"CA does not believe that the retail market model chosen by the Government for providing access is the best approach given the comparatively small contributions involved and the low return environment and is not in the best interests of consumers and taxpayers and may be ultimately counterproductive." (5) x
Angela Eagle MP asked the Minister Ruth Kelly:
"Why are you so optimistic that the industry actually wants to change when we have had lots of experience, from hearing the evidence, of the industry actually wanting to shoot the messenger?" (Q2118) x
The industry does not have the slightest intention of changing. Why should it when it can sit back and be rewarded with lucrative contracts like CTFs?
A "1 per cent cap on charges" was a cornerstone of government policy for savings. This has largely been replaced with another 1.5 per cent cornerstone. But there are charges outside the cap which are hidden, x so that "cap on charges" should be "cap on explicit charges".