'Govt must act on with-profits'

URGENT action is needed to avert a 'national nightmare' caused by the meltdown of with-profits policies, warns an industry expert.

John Chapman, former director at the Office of Fair Trading, warns that bonus cuts will continue, even with improved stock market conditions, as insurance companies rebuild reserves battered by the plunge in share prices.

Endowment policies were sold heavily in the late Seventies and early Eighties by insurance companies with the claim that they were likely to pay off the mortgage and produce a bit extra.

Falling stock markets have led to insurers warning that many policies will not even pay off the associated mortgages. Chapman, writing in Money Management magazine, published this week, says: 'To ensure that millions of policyholders are treated fairly, an orderly rundown of with-profits operations is required - a task that the Government, the industry and the regulators should address now.'

Chapman's biggest concern is for the ten million homeowners whose money is in closed with-profits funds. These funds have suffered particularly hard from bonus cuts. Chapman believes there is little incentive for managers of such funds.