MPs slam insurance chiefs' bumper pay rises

The chief executives of Britain's biggest insurers were yesterday slammed by MPs for accepting bumper pay rises at a time when millions of homeowners are facing shortfalls on their mortgage endowments.

They were told that increases in salary of up to 70% between 1999 and 2002 were "way out of line" when their policyholders were suffering as a result of deep cuts to policy bonuses and final payouts.

Embattled insurer Standard Life came under particularly heavy fire, with Treasury select committee chairman John McFall pouring scorn on statements made by the company aimed at reassuring policyholders in the wake of its talks with the Financial Services Authority over its financial position.

"I would suggest Comical Ali is the very model of rectitude compared to this fantasy stuff coming out of Lothian Road [Standard Life's Edinburgh head office]," he said. "There is a need to be straightforward and honest with us, not to give us waffle."

Appearing before the committee, the heads of Standard Life, Aviva (which trades as Norwich Union), Prudential, Legal & General and Royal & Sun Alliance conceded that the cost to consumers of the mortgage endowments crisis could reach £30bn or £50bn. Some commentators have suggested the total bill could go as high as £100bn.

During the past few years millions of homeowners relying on endowments to pay off their mortgages have received letters from their insurers warning that the policies may not produce enough cash. Cuts in bonuses and final payouts have exacerbated the situation, leaving many people facing sizeable shortfalls.

Norwich Union and Royal & Sun Alliance yesterday each revealed for the first time that nearly nine out of 10 policy holders faced a high or significant risk of a shortfall.

Norwich Union, with 1.3m endowment policyholders, said 39% of policies were "red," where there is officially a high risk that it will not grow sufficiently to pay off the mortgage, while 48% were "amber", which means there is a significant risk of a shortfall. Royal & Sun Alliance said 81% of its policies - 407,000 - were red.

Yet while the industry was "going downhill like a slalom skier", chief executive pay had surged, said Mr McFall. Between 1999 and 2002, the salary of David Prosser, chief executive of Legal & General, jumped 55.8%, while for Aviva and Prudential - headed by Richard Harvey and Jonathan Bloomer respectively - the figures were 45% and 52.5%. Standard Life's former chief executive, Iain Lumsden, saw his pay package jump 71%.

"At a time when people are suffering and feeling the pinch, it seems that these are way out of line," said Mr McFall.

There have been reports that Mr Lumsden, who resigned unexpectedly this month, is to collect an annual pension of £300,000, though Mr McFall said some had suggested it could be as high as £430,000 a year, which would require a fund of up to £7m to support it. Mr McFall suggested to Mr Lumsden's successor, Sandy Crombie, that urgent action was needed to align executive pay structures with policyholder interests.

Earlier, Mr Crombie said that in terms of mis-selling, about 10% of endowment policyholders had lodged complaints. In many cases it had examined the paperwork relating to the sale and found that the records were "somewhat inadequate". Mr Crombie added: "We are putting our hands up."

The Pru and Norwich Union were also in penitent mood. Aviva head Mr Harvey admitted: "Earlier warning to customers of the likelihood of a shortfall or a shift in conditions would have been a good thing." Mr Bloomer said: "I regret we didn't write a little earlier as economic conditions changed."