Insurers demand review of price caps to encourage higher savings

The Association of British Insurers has called on the Government to back down on the tough price controls it has introduced on the savings industry and allow insurers to charge more for their products if they are to encourage low earners to start saving.

The trade body said the Government's strategy to get more low-to-middle income earners to provide for their own retirement through low-cost savings vehicles had backfired. Since last year, pension companies have been limited to charging no more than 1 per cent a year for a stakeholder pension. This has meant insurers have only been targeting customers able to pay large premiums in order to break even.

Ron Sandler, the former Lloyd's of London chief executive who was asked by the Treasury to investigate retail savings, has already recommended the introduction of a new range of simple, easier to understand, savings products with limited charges. The ABI wants a review of the 1 per cent charge cap before more price controls are introduced.

Research undertaken by Oliver Wyman & Co on behalf of the ABI, published yesterday, shows simple savings products with built-in safety features would encourage more people on lower incomes to start saving

Oliver Wyman identified last year there is a £27bn shortfall in what people are saving in order to enjoy a comfortable retirement. It has found simple products, with less red tape around how they are sold, could boost savings by as much as £5bn a year, but price controls make the cost of selling such products prohibitive.

Francis McGhee, head of life insurance at the ABI, said: "This research shows simple products could make a £5bn dent in the UK savings gap, but these products will not walk off the shelves. A 2 per cent annual charge would allow us to cut the gap by more than twice as much as 1 per cent."

The report found that, under current regulatory restrictions, in order to sell a policy to someone only able to afford to pay in £20 a month, companies need to charge 5.85 per cent to break even.

Mr McGhee said many insurance companies no longer have enough capital available to continue financing such low charging products. Some companies are already starting to withdraw from the market because the business is unprofitable. "There are signs some companies are changing their original views on the stakeholder market. The access to capital they have is now very different. There was a race for market share at a time when stockmarkets were higher and capital available was high. We are now seeing a retrenchment," he said.

Insurance companies welcomed the findings. Peter Hales, sales and marketing director at Norwich Union, said higher charges would give more providers more scope to actively sell savings products to a wider audience.