Insurers who just won't learn

The salespeople are up to their old tricks in the pensions market.

Tony Baker is a worried man. A few weeks ago, during a routine telephone call to a journalist, the deputy head of the Association of British Insurers gave vent to his anguish: "Why are we under attack? What do we have to do to in order to get a better press?"

Only a few days before, members of the House of Commons Treasury select committee had vented their spleen on the insurance industry's top regulator, Colette Bowe. The anger of MPs was directed at the failure of the Personal Investment Authority, which Ms Bowe runs, to oversee swift redress by insurers to hundreds of thousands of victims of the pensions transfer scandal. Between 1988 and 1993, more than 1.5 million people were wrongly persuaded by insurance salesmen to switch out of perfectly adequate company pension schemes and into private ones. The casualties could lose many thousands of pounds each as a result.

In the course of a bitterly hostile appearance, Ms Bowe told the committee that barely 8,000 people - out of some 500,000 urgent cases - had been paid compensation. In fact, as she conceded, almost 15,000 victims of the scandal have died since her organisation committed itself two years ago to secure payments for those mis-sold a personal pension.

Ms Bowe's admission is the least of the insurance industry's problems. Tonight, it will come under the spotlight over another pension-related issue. A joint investigation between The Independent and World In Action, the Granada TV programme, will show that hundreds of thousands of personal pensions sold last year (one third of the 900,000 total) may be worth less after two years than the amount paid into them.

The investigation, featured in this newspaper on Saturday, reveals that despite claims by Mr Baker's members that they have been born again after the pensions mis-selling scandal, someone forgot to pass the message on to the industry's stormtroopers. World in Action is planning to show how a succession of insurance company salespeople recommended inappropriate long-term pension products to one of its researchers, whose employment with the television company is due to end in September.

The programme also highlights perhaps the most significant issue, that of the extent to which all of us as taxpayers are paying for the industry's scams. Each year, the Government pays billions of pounds of taxpayers' money towards personal pensions set up by some eight million policyholders. The money comes in the form of generous rebates, so that for every pounds 100 of gross premiums paid into a private scheme, the Inland Revenue chips in at least pounds 23 of that amount. This rises to pounds 40 for higher-rate taxpayers, leaving them to find just pounds 60 in contributions.

But if, as our investigation shows, significant numbers of policyholders may receive less when their policies mature than was actually paid in, who actually benefits? The answer is that insurance companies themselves do, through the massively high initial charges levied on pensions they sell. Their profits come out of our pockets.

For insurance salespeople this cash is manna from Heaven. Their commission payments are in effect being subsidised by taxpayers to the tune of hundreds of millions of pounds a year. For the rest of us, this state of affairs cannot be allowed to continue.

There are several ways in which reform can take place. The first is the organic approach, where insurance companies gradually overhaul themselves and begin to offer better value to their policyholders. This is already happening in part: even so, progress is painfully slow.

John Denham, Labour's shadow pensions minister, offers new "stakeholder" pensions, set up by a mixture of employers' organisations and trade unions. These would offer insurers the option of competing in price terms or going under. Or, if they wanted to tender for the right to manage these new funds, they would have to charge low, low prices.

John Chapman, the former Office of Fair Trading official whose research we have published, has a third solution. Why not simply halt tax rebates into private schemes that either have a large number of policyholders leaving them early or don't lower their prices? Doing so would swiftly bring the recalcitrant to heel, he claims.

Of course, this won't make Mr Baker or his members happy. But then, on the available evidence, Mr Baker is not at present a happy man anyway.