Huge charges exposed Enforced disclosure shows that commissions and other expenses swallow up to a t hird of life and pension policy contributions

UP TO a third of contributions towards life insurance and personal pensions policies can be swallowed up in the company's charges.

For the first time, under new Securities and Investments Board rules that came into effect last week, the true costs of policies are being disclosed to the client before they buy a policy.

An exclusive Independent on Sunday survey of endowment policies, one of the main savings vehicles used pay off mortgages, shows a vast difference between charges made by different life insurance companies.

Until the SIB enforced disclosure it was virtually impossible for prospective policyholders to discover how much of their savings would be absorbed by commission, marketing, advertising and other promotional costs.

Last year, the SIB mde disclosure voluntary; only now has it become compulsory. The reason insurers did not make use of the voluntary option stemmed from fears of a flight of savers' money from life insurance to unit and investment trusts, where commissions are commonly only a few per cent. That flight may now begin.

At the top end of our survey, the most expensive offices - such as Guardian and Royal Life - use up around 30 per cent of the money paid to them by customers. The average is about 25 per cent.

But even at the low end, expenses represent nearly a fifth of the total amount paid in. Typically, companies owned by banks or building societies may be able to offer cheaper-looking products because their economies of scale enable them to spread overheads and keep costs down.

Our survey also discovered that there has already been a switch away from companies paying sales people large amounts of commission up front. Instead, many are paying the commission over the term of the policy The Consumers' Association believes that oneof the reasons why policies have been mis-sold is the large amount of up-front commission earned by the salesperson.

Neil Munro, deputy head of the CA's money group, said: "We believe that the rules are good and in the consumer's best interests. The system of paying commission up front has been the root of many problems in the life insurance industry."

Insurers' apparent nervousness about the new rules broke surface last week, when Bradford & Bingley Building Society withdrew as a user of the industry's Exchange system.

The Exchange, backed by leading insurers, is designed to give independent financial advisers access to commission and other details. However, at least six insurers, including Albany Life, Britannia Life, Eagle Star, Guardian, MGM and Provident Life, are not providing quotations, and others have so far logged only a proportion of their policies. This devalues the Exchange, the whole point of which is to make it easier to compare different companies' products.

While MGM simply declared that it was withdrawing until later in the year, the others have pleaded difficulties in connecting their computer systems to the Exchange.

Nigel Phillips, the Exchange's director of commercial services, said last week that when the system started on 3 January it was carrying 70 per cent of the range of products it would eventually have.

Geoff Lister, chief executive of the Bradford & Bingley, said: "Our branches are not using the Exchange at all. It's very frustrating."

Life in the spotlight, page 8