The insurance industry fears that the Equitable Life debacle will bring public confidence plunging to depths not seen since the height of the pension misselling scandal.
The fact that the UK's fourth-biggest insurer and the oldest mutual insurer should close to new business is serious enough in its own right.
Now potential investors are going to be much less likely to put money into savings plans, either pensions or other inv estments, if they are unsure about the future stability of the companies managing that money.
The Government has been busy plugging stakeholder, which begin next April. There have always been concerns about the viability of these schemes. Now some in the industry and in Parliament feel the effects of Equitable's demise will result in it being virtually impossible for stakeholder to be a success.
In December's Parliamentary debate on Equitable, opposition politicians of both major parties made this argument.
Liberal Democrat Department of Trade and Industry spokesman Vincent Cable and Conservative shadow economic secretary Howard Flight argued that stakeholder would suffer because of what has happened with Equitable.
However, Treasury economic secretary Melanie Johnson read from a prepared text that ignored the issue of stakeholder altogether.
Cable says: “Equitable Life had an investment philosophy which in many ways is similar to that of stakeholder pensions.
“It operated in a very inv estor-friendly manner. They allowed such things as flexible payments in the event of a redundancy. If a company with that type of approach is undermined, it has got to sow serious doubts in the minds of potential investors.”
Flight says: “There will be considerable problems promoting stakeholder pensions. The Government must have known the way this was going for at least three years.”
Cable says that, while the inquiry announced by Johnson at the debate is a step in the right direction, it is far too narrow in its scope. He is calling on the Government to hold a Cruickshank-style report on the regulation of the insurance industry along the lines of the inquiry into high-street banks earlier this year.
He points to a number of issues that have affected the industry and perhaps more importantly consumer confidence in the industry. These are endowment shortfalls, orphan assets and with-pro fits funds, which have all come under attack in the last 12 months.
Cable says that, until the Government concedes that much needs to be done to restore public confidence, the insurance industry will continue to suffer. By only looking at the Equitable debacle, he believes the Government is closing its eyes to the bigger problems that exist.
A Treasury spokesman says: “Stakeholder pensions will virtually be unit-linked rather than with-profits so there will be no problem with the issue of reserve funds.”
As the argument goes, for with-profits funds to be successful, providers will need huge reserves to see them through the years before a profit can be made.
Not many providers have the kind of funds necessary. Because of the guaranteed annuities debacle, Equitable did not have the funds and this is one of the reasons it was forced to close its doors.
Companies must be prepared to lose money on a product for up to a decade before they see any returns. Some industry sources believe there are few providers willing to take this chance.
Industry figures say that, while there might very well be problems because of an increased lack of confidence in the insurance industry, the differences between guaranteed annuity rates and stakeholder are great.
The industry accepts that there is a grave danger that public confidence will suffer but it believes politicians should be wary of making direct comparisons between guaranteed annuity liabilities and stakeholder.
Scottish Life head of communications Alasdair Buch anan says: “The general public is going to have less conf idence in the financial services industry. It is our job to convince them that it is not a financial services problem, it is an Equitable Life problem.
“If the credibility of the industry is undermined, then stakeholder will suffer along with all other products.”
Clerical Medical head of pensions strategy manager Nigel Stammers says: “The bigger question the Treasury has to answer is how important is with-profits within stake holder pensions? The Government does not seem to think so but the industry believes it will be.”
A recent Clerical Medical survey shows that 63 per cent of IFAs think with-profits will form a significant part of stakeholder pensions. This may be difficult if MPs' concerns are realised.
Scottish Equitable man ager (pensions development) Steve Cameron is not convinced with-profits will play a big role in stakeholder. He says the regulations the Government has created make it difficult for providers to offer with-profits stakeholder.
But he does concede that the lower the reserves a fund or company has, the more constrained the investment freedom will be. This is similar to the Equitable situation in that a big part of its investment philosophy was to redistribute funds and not allow reserves to build up.
Cameron is quick to point out, however, that he does not see many connections between Equitable and stakeholder.
This issue is not likely to go away as it becomes the whole extent of the Equitable situation becomes clear. Pressure on the FSA and the Treasury to take a more active role in the supervision of life offices will grow, both from the industry and MPs.