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Sandler doesn&#39t make the grade

I have been assessing comments on the Sandler report now that many have had time to digest his glossy blue book. Comments seem to fall into two main categories -hysterically anti regarding much of the detail or fawningly obsequious. Ignoring the detail and looking at it in the context of the bigger picture, it is a rubbish piece of work. If I had handed in such a piece when I was at college I would have had it thrown back in my face. These are the comments I would have made as an examiner:

In your second paragraph in the foreword you say that “the industry has achieved considerable success in encouraging a wide range of consumers to save… it has also made a significant contribution to the UK economy”. So why bother with the remaining 225 pages?

Nothing is perfect and if the industry has been that good, why now decide to change it?

Overall, however, it is not a lot of use providing solutions, without properly defining the problem – which you have manifestly failed to do.

1: You do not detail what reasons you see for the lower UK savings ratio compared with our European partners. Indeed, you, along with many others, seem to ignore completely the fact that we are part of the European community and still provide irrelevant comparisons with places such as Singapore, Australia, the US and Canada. Comparisons should be made with Spain, France, Italy and Germany.

2: Your report seems to ignore entirely the ambience in which the people you seek to advantage find themselves. In the UK we work longer hours, live in smaller houses, accumulate more mortgage debt, have the highest cost of living and have fewer holidays than any of our European counterparts. This is not supposition, it is fact.

You then expect those who have the least resources to eschew an improved standard of living to buy, of their own volition, off-the-shelf products, the long-term benefits of which are unclear and, in falling markets, could turn out to be a demonstrable waste of money.

Why should we then be surprised that the 2001 household savings ratio was only 5.4 per cent in the UK while it was 10.2 per cent in Germany and 16.4 per cent in France? Why have you not addressed the reasons for this?

Incidentally, while comparing us with the US you might also like to make mention that their savings ratio is 1.6 per cent for the same period. Hardly the sort of comparison that you would wish to make.

3: Why do you not compare the UK&#39s savings ratio in 1970 when it was more than twice as much as it is today? What is the reason for this?

In your report, you mention that tax relief does not influence overall levels of saving merely their application. However, it is hard to accept this without specific proof, particularly as rates of tax in the 1970s were far higher than they are today and that the tax relief on savings products were accordingly a lot more generous and numerous.

Part of the gap surely must be because benefits we get from the state have been reduced. If this is so is it not inherently dishonest to imply that it is all down to individuals?

4: When bemoaning the fact that we do not save enough in the UK (which at the moment is demonstrably true) how do you reconcile this with the fact that we have more private pension savings in the UK than the whole of the rest of Europe combined? Please explain and discuss.

5: Most important, you completely ignore matters of debt. The matter of debt is an entirely dishonest aspect of the UK financial scene. Individual debt is now at levels never before seen.

On the one hand, it is criticised as being imprudent but, on the other, the wheels of the economy would certainly grind a lot slower without it.

From an individual&#39s point of view it is hardly an efficient allocation of resources and most people would probably be a lot better advised to reduce their level of debt rather than trying to find the wherewithal to fund £50 a month in pensions. This calumny is perpetrated by a disingenuous Government, which now forces students into an ever spiralling debt cycle, even before they become earners.

6: Much of your thinking seems very muddled. If there are no tax incentives, then one might as well invest or save in any product – why in a pension which is tied up to 50? A point you yourself make.

But if savings are not tied up, then how can you be sure that the funds are available when they are needed when work ceases? Again, your simple stakeholder products for the disenfranchised colludes with the Government once more and ignores the fact that most people would be better off avoiding this form of savings and relying on their state benefits which would only be curtailed pro rata if they made the effort, or at best their effort would be taxed at 40 per cent – hardly an incentive.

7: Complication seems to exercise your mind. True, much is needlessly complicated but much of this (as you point out) comes from the Government. Peps were “simplified” and became Isas.

There is plenty of scope to simplify pensions, as you have also pointed out. However, one needs to be careful that simplification does not become dumbing down. Life and the modern world are complicated and you cannot iron it out for idiots. This is the era of computers, mobile phones and GPS in vehicles. A level of complication has to be accepted. You only need to fill out a tax return to appreciate this.

8: With regard to incentives, I believe it is much more in the gift of the Government to provide incentives than the life industry.

The usual example will suffice. Two neighbours – one careful, one feckless – both end up in an old age care home. The careful one has all his assets and his house taken. The feckless one who has enjoyed a riotous lifetime enjoys the same benefits. Those who do nothing must be demonstrably not as well off as those who make the effort. Taxing careful people at 40 per cent for making the effort is not the right message.

9: Perhaps the most severe failing of the life industry was completely overlooked by your report. The abysmally poor administration which many of us feel is a direct result of all the recent so-called initiatives which have lead to thinner margins, poorer staff and consolidation.

Many of the life offices now pay peanuts and get the monkeys they deserve. Your savers are going to learn very quickly how wonderful it is to sit on the phone listening to banal music. How much that will do to improve their confidence in the industry remains to be seen.

10: I do not see a cost-benefit analysis anywhere in the report nor is there any acknowledgement that Europe will fall in step with your proposals. If they do not, then it would seem that many of us are destined to be working in Calais and selling our products to our countryfolk across the Channel and probably earning commission on it, while still calling ourselves independent.

Finally, although not part of the broader picture, I could not resist commenting on your observations concerning commission. They seem to indicate that you have not really understood the finer points.

Why you think commission is perverse when previous reports have stated there is no commission bias appears to be an obstinate observation that seems to emanate from this Government.

Indeed as many quarters have already said, if you are so concerned about commission bias why not reintroduce the maximum commission agreement?

Concerning your proposals (and those in CP 121),I leave aside the matter of policing and how proposals will work in detail but a few selected illustrations will serve to put across the main points.

Assuming that an independent adviser does not take commission on currently unregulated products such as term insurance, then I do not see the advantage to the client of charging a fee.

The difference in premium between paying commission and not paying commission on a term insurance contract is so small that even if one rebated it would take the client over 15 years at least to recoup.

How much better then to take all the commission, deduct what is agreed as your fee and rebate the rest to the client. Even if he has to pay tax on the rebate he is better off.

The same applies to pensions. In many cases, even when rebated commission is declared and tax paid, it is still more cost-effective and boosts the tax-free cash lump sum.

Your report does make mention of this option but what it fails to appreciate is the workings of commission rates themselves. If independents take no commission, what is the amount which will be rebated into the contract?

Currently, as you know, there is 100 per cent of Lautro rates and then enhancements. If I am on an enhanced rate, then the client has this benefit if commission is rebated. If I am identified as independent, the life offices will in future presumably blanket all of us under the 100 per cent rate.

If this is to happen, then a “salesman&#39” would, in theory, be able to give the same client a better deal on the same product. This is perverse.

In essence, your report is much more concerned with what may be called the minutiae instead of the broader picture. Do you really think it is going to make a substantial difference to people&#39s savings habits if you footle around with definitions and remuneration of advisers?

Do you really think that reducing the tax incentives will have no effect on the overall savings ratio? (Dr Ros Altmann disagrees with you).

Do you really think it is more important to have margins so thin that providers are not incentivised or indeed able to survive rather than ensuring the correct ambience (macro economically) to encourage people to save? Unless you have addressed the broader issues, it would seem to most rational minds that the detail will remain an unachievable irrelevance.

In the UK, we make much of the fact that our European neighbours will not be able to sustain their pension liabilities. Meanwhile, they continue to do so and our pension benefits continue to decline.

We have the highest social taxes in Europe with the least social benefits. We now send our sick to France who have an infinitely better health service than we do. Many of us in the UK choose to pay premiums to a private medical insurer so we do not have to spend 10 hours in a hospital corridor awaiting treatment rather than spend the same amount on adding to our savings or pensions.

Then there are those of us who choose to send our offspring to private schools. Of course, this ignores the fact that even less ambitious parents will now have to find money to help their children through college if they do not wish graduates to exit with unsustainable debts (see 5 above).

These considerations surely must have an affect on the savings ratio and your long and expensive report seems to entirely ignore the real world. It would seem that many an undergraduate could have produced something of more worth. No doubt your reward will come in January.


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