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A churn for the worst

Christmas 2005. It has taken a while to get round to thanking rea ders for their good wishes on my retirement.

Is it really seven years since the Green Paper on welfare ref orm – the one that introdu ced the idea of stakeholder? At the time, some of us rem ar ked that much of what the Gov ernment sought to ach ieve could have been brought about by adjustment of the regulations then governing personal pensions.

After masses of consultation papers and literally millions of words in the pinks and elsewhere, the Government discovered that the best way to introduce its stakeholder regime was indeed to amend the existing personal pension regulations.

The Government said it wanted to simplify pensions and the decision-making pro cess for individuals. By early 2001, we were all entirely clear about the way in which the basic State pension, the minimum income guarantee, the second state pension and the pension credit would interact.

We marvelled at the simplicity that meant we only needed 11 decision trees to help the customer sign up for the bright, shiny new stakeholder. Some of us were worried that the trees left out any reference to contracting-out but the authorities did not appear to share our concern.

Heady days, those. Just in time for Christmas 2000, we got the news that there was to be a change to the polarisation rules so that anything with a Cat mark could be multi-tied to salespeople who were already tied.

Gordon and Melanie (rem ember them?) were quite sure that polarisation distorted competition and Howard (rem ember him?) was told sharply that he had better get on with consigning it to the dustbin of history.

New Labour duly won the general election in 2001 and was soon able to trumpet the success of stakeholder. It was ironic – or mildly hysterical, depending on your point of view – that the success was commission-driven.

At one stage, there were 35 life companies saying they were going to offer stakehol der, that they needed at least 12 per cent of the market to make it worth their while and that they had at least six good reasons to believe they would succeed. So they paid 70 per cent of Lautro rates with a 12-month earning period on a 1 per cent annual management charge.

You dug up your old personal pensions, Pupped the old-fashioned model and sold the client a stakeholder from life company A with a contribution of £100 a month. In its infinite gratitude, life company A gave you about £420 – half what you would have got before but better than a poke in the eye with a sharp stick. Compliance was neither here nor there.

As luck would have it, inv estment returns tracked the central assumption. So, after a year, the client still had his £1,243 and you still had your £420. At this point, the life office which sold the policy had £6.

On day 366, you visited the client for a review. You transferred out of stakeholder A and started a new stakeholder with life company B, which was similarly generous and shelled out £420. Assembling pension savings this way wor ked better for the client.

Should you have done it? Would the client have sued you if you had not?

Stakeholder transferred funds from with-profits policyholders and/or share holders to IFAs. The class actions by the with-pro fits policyholders will reach the Lords next year.

There were mutterings that IFAs had encouraged people to select against the life offices. IFAs replied rob ustly that if the life offices were daft enough to provide the opportunity, IFAs&#39 duty to their clients was to help them grasp it.

By 2003, the stinking fish, as the FT once memorably remarked, were coming home to roost. People had come out of s226 contracts and found that their tax-free cash position was less favourable, they had lost valuable guaranteed annuity rates and they had also lost with-profits guarantees. The leavers from perso nal pensions had lost waiver and tax-effective life cover, into the bargain. Lots of people had actually been persua ded by the multi-tied bri gade to move savings into higher-charged environments than they had hitherto enjoyed.

Misselling reviews were in the air again.

Stakeholder was a sink into which providers poured money and the losers got bought out. The latest acquisi tion splurge in 2004 has left us with a mere handful of full-line product providers and a large number of niche players.

So we have lost many old friends, as well as the Equit able, and the mass markets are dominated by banks and global fund managers, which have swallowed up most of what we used to know as the life industry.

Multi-ties have been with us for three years. Not much has changed.

There were consulting act uaries who were IFAs. There were accountants and solicitors who were IFAs. There were people who had slaved for years to gain ACII or APMI qualifications who were IFAs. There was a host of – in effect – freelance manufacturers&#39 agents who were IFAs. There was nothing wrong with this latter group. They sold policies. They mostly did it pretty well. There were some classy direct salespeople and some perhaps not quite so classy.

These practitioners were all practising before the FSA and before the change to the polarisation regime and, in one way or another, most of them are practising now. Most of them are doing more or less what they did before, even though the regulatory regime that some of them inhabit is a bit different.

Now we have a new Gov ernment with lots of new and exciting ideas about pensions. As ever, some will save and some will not. Where they sa
ve will always be a function of generations of fiscal prom iscuity. There will be good money to be made bringing all those Isas back into a pension environment.

Good grief. Merry Christ mas to you all.

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