MPs blast scandal of closed funds

A STAGGERING 11m people are stuck in with-profits funds that have been closed to new savers, according to a report published by the Treasury Select Committee today.

The committee launches a scathing attack on insurance companies which have trapped £160bn of savers' money in closed funds.

These funds offer limited investment growth prospects and often charge huge penalties to those who try to get their money out.

The savings industry is accused of 'limping from crisis to crisis' withms of people now distrustful of investing their money and planning for their retirements.

Money Mail has been campaigning tirelessly on behalf of those trapped in closed funds, putting pressure on insurance companies to come clean with savers, many of whom may not realise what has happened to their money.

The report - Restoring Confidence In Long-Term Savings - is the product of months of grilling of chief executives of the biggest insurance companies, the Financial Services Authority and consumer groups.

The sheer scale of the problems blighting the financial services industry have been highlighted by the committee - from the £40bn shortfall facing endowment mortgage customers to the £2.2bn of losses for precipice bondholders.

Huge pay rises for insurance company bosses have also come under fire at a time whenms of people are struggling to pay off their mortgages after being mis-sold endowment policies.

John McFall, chairman of the Treasury Select Committee (TSC), says: 'The industry needs to break out of the pattern of recent years that has seen it limp from crisis to crisis, each one inflicting more damage on its reputation in the eyes of savers. This damage must be reversed.'

He has set a deadline of this winter for firms to come back with proposals to meet his demands.

The main findings and recommendations are:

About half of all with-profits policyholders, with savings of about £160bn, are stuck in closed funds offering limited growth. The problem will get only worse as more funds will be closed in the next few years.

Recommendation: Those trapped should be free to leave these funds without high exit penalties, and should be in line to benefit if closed funds are merged.

WHEN a savings product is sold by an independent financial adviser (IFA), they receive 'initial' commission upfront along with 'trail' commission each year, regardless of whether or not they give ongoing advice.

This costs the consumer thousands of pounds. The TSC says it is 'unacceptable'.

Recommendation: Trail commission should be awarded when annual advice is given. And savers should be given the option of paying in fees, not commission.

Longer-term, it wants a move away from commission-driven sales as they don't benefit the consumer, only the salesman.

People don't understand the riskiness of the products they are buying and are confused by the charges they are paying for the sale and advice.

With-profits funds are not transparent in the performance of their investments and the high exit penalties they charge.

Recommendation: Firms should be required to give a much clearer explanation of penalties and the reasons they are imposed.

Summary boxes for all savings products should be included. A standard scale of risk for savings products should be included in these boxes.