COMMENT : Annual bonus declarations a meaningless ritual

It's that time of year again; the annual and now almost ritual declaration of terminal bonuses paid on with-profits endowment and pensions policies. General Accident kicked off the season yesterday. Over the next few weeks there will be many similar announcements. Each January, millions of policyholders wait to see how much they might get - were their policies to mature this year. For the vast majority, they won't mature this year. The bulk of with-profits endowment policies were sold at the height of the 1980s housing boom and, if they have been kept going this long, still have many years to run.

Using today's figures to project 15 years into the future is a pointless exercise. Nor do any of these glowing progress reports change an awful truth about this industry - that though well intentioned enough, it is basically in the business of ripping people off.

Let's be clear about this. Policies held through to maturity generally perform reasonably well. Provided you keep up the payments right through to maturity the returns are good. Those who do not, however, pay an extremely high penalty. And unfortunately, that happens to be the majority.

According to John Chapman, a consultant who used to work on these matters at the Office of Fair Trading, there is widespread manipulation of charges and surrender penalties to project or achieve high maturity pay-outs and as a consequence the illusion of good value. He'll soon have prepared an analysis to demonstrate this contention (watch these pages). Commission disclosure and other reforms designed to make this a less opaque industry seem to have done nothing to correct the problem. Early surrender rates remain as high as ever. Generally such savers end up as net losers; it costs them to save.

There is an obvious riposte to this line of attack and it is this - that those who take out with-profit policies know what they are letting themselves in for. But even accepting this is true, which is debatable, there's got to be something wrong with an industry which actually requires savers to fall by the wayside to deliver reasonable value to those who struggle through to the finishing line.

With a bit of luck all these iniquities should ultimately prove self- correcting. Greater transparency, together with more savvy and financially literate consumers, will force these companies to transform themselves. In the meantime, however, regulators urgently need to step in and do something. Mr Chapman's call for the development of a published rating system, forcing companies to cite surrender values at various stages of maturity, would seem a reasonable start.

GB Railways steams towards rich pickings

If the initials GWR stood for God's Wonderful Railway, then GBR surely stands for God's Bounteous Railway. Whereas the Great Western Railway was strictly for Victorian train buffs, however, GBR, or GB Railways, is for folk interested in making serious amounts of money.

In its newly quoted form as an AIM stock, GB Railways, proud owner of the Anglia Railways franchise, came out of the sidings like an express train yesterday, racing to a 110 per cent premium. That much was, perhaps, to be expected following the example set by Prism Rail, another AIM vehicle, for making monkeys out of the Department of Transport.

Those who have followed Prism's dizzy rise will be familiar with the formula adopted by GB Railways for the franchises it hopes to pick up.

The directors, led by Lord Sheppard, former chairman of Grand Met, have magnanimously volunteered to fund the costs of the next bid for Thameslink themselves. If they are successful, they are in trainspotters' heaven with share options worth pounds 2.63m at last night's closing price against an exercise price of just pounds 9,000. A nice little earner if you are a director of GB Railways but a hideously expensive way of raising capital if you are an outside shareholder.

Still, perhaps we should not be too churlish. The founders of Prism and GB Railways were prepared to risk their necks when the Government could not get big players in the transport industry to take the railways off its hands for love or money. All the same, the risk factor was rather lessened by the sight of Sir George Young on the footplate shovelling public subsidies into the furnace by the bucketload.

His former franchising director, Roger Salmon, devised a way of allowing taxpayers to share in the bonanza by enabling them to claw back a proportion of super-profits. Sir George rejected the advice on the grounds that such a move might deter bidders. With the kind of riches to be had at GB Railways and elsewhere, who was he kidding?

Bonanzas that keep getting bigger

If privatisation was Mrs Thatcher's gift to the middle class, a way of selling pounds 1 worth of shares for 50p, what should we make of this year's building society and insurance demutualisations, where you don't even have to put up any money in advance to get the loot?

All the signs are pointing to an even bigger bonanza than originally anticipated - a net distribution of perhaps as much as pounds 25bn, including Norwich Union. This is considerably more than earlier estimates and enough to give a powerful kick to consumer spending. Individually these are relatively small amounts, widely spread. All the same, they are a lot bigger than the sort of gains made from privatisation and the old theory that most of the money will remain on deposit is looking weaker by the week, as consumer confidence rises ahead of the election.

The emerging boom in the housing market is pushing up predictions of the size of the payouts, by helping to drive up the shares of banks such as the Abbey National and Lloyds TSB, which will provide the pricing benchmark for building society demutualisers. That might sound like a virtuous circle to a Tory MP in a marginal seat, but in fact there will not be as many winners in this game as there seemed at first sight.

Inflation is the most obvious downside of the spending boom these flotations helped on its way. Demutualisation has also meant a worse deal for customers. Members locked in by the lure of bonuses do not need to be wooed by competitive interest rates. Northern Rock has already put its standard mortgage rate half a percentage point above those societies which intend to remain mutual. On a pounds 50,000 mortgage that makes a mortgagee approximately pounds 250 a year worse off, which would eat rapidly into a pounds 1,000 bonus.

It used to be argued that rates would tumble after the payouts, as real competition set in again, but that is less likely now because of rising demand for mortgages. But let's not be churlish. There is something at least that the Woolwich should be congratulated on - yesterday's announcement that it will pay members according to the size of their accounts and the length of time they have had them, shaming Alliance & Leicester, which insisted on a flat rate payment to all savers.