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A Consumer&#39s View

As the date for the introduction of stakeholder pensions looms, there must

be quite a few IFAs concerned over how they will survive. Stakeholder will

have a profound effect both on product providersand IFAs with

substantialpension business.

The maximum 1 per cent annual charge on stakeholder will very rapidly

become the norm for all pension policies.

Who will want to buy a personal pension where charges over the life of the

policy can easily work out at 30 per cent of the total proceeds when they

can buy a stakeholder with charges limited to 1 per cent of the value of

the fund? Clearly, not very many people at all.

At the moment, the industry appears to be burying its head in the sand and

hoping that stakeholder will go away.

Only half-a-dozen life companies offer genuinely stakeholder-friendly

personal pen-sions – Equitable Life, Friends Provident, Marks & Spencer

and Virgin Direct, with Legal & General and Nationwide Life included,

provided that policyholders transfer to a stakeholder within the same


It is yet another example of the industry&#39s cynicism. Life companies

continue to foist third-rate products on individuals right up until the

last minute, knowing full well that the same investor could buy a better

product with lower charges in a year&#39s time.

The FSA has been moved to express concern at this depressing state of

affairs which reflects very badly on the industry.

But how will those IFAs heavily dependent on pension business survive once

the new regime comes into force?

The answer is with difficulty – unless they are already operating on a

fee-charging basis or reckon that, by selling to employers rather than

individuals, they will be able to increase their business at least three or


At the moment, IFAs can earn up to 6 per cent initial commission on

single-premium pension business and as much as 18 months&#39 contributions for

regular-premium policies. There is no way that life companies will be able

to afford commission at these levels out of stakeholder charges of just 1

per cent of the fund&#39s value.

Admittedly, the market for personal and stakeholder pensions is set to

expand dramatically. With all employers with five employees or more obliged

to offer a stakeholder pension, an estimated five million potential new

investors will be in the market.

This assumes, of course, that employees will join a stakeholder scheme,

which is not very likely unless the employer makes a significant

contribution. Anyway, most of the lower-income employees who make up the

unpensioned will be better off investing in an Isa.

Whether employers will make a contribution or not remains to be seen. But

many small companies will not be able to afford to do so – which is why

most have not set up a scheme up until now – and no doubt many others will

not promote the scheme actively because it will cost them money they can

ill afford.

This will be a tough market for IFAs to crack. With a standardised product

like stakeholder, decisions on which plan to buy will be based entirely on


It is likely that there will be relatively few providers of stakeholders

in the market, so even the dumbest personnel officer will be able to get

hold of some sort of investment performance tables and make a decision

without the benefit of independent advice.

IFAs will also find themselves in direct competition with the product

providers which will, no doubt, target medium-sized companies with a direct


Finally, the introduction of stakeholder will undoubtedly precipitate more mer-gers and takeovers among the life offices.

Pension providers which have relied on hefty commission payments to sell

third-rate products will no longer be able to survive.

This is a market for a very few big players with deep pockets which are

able to fund the up-front costs of stakeholder and wait for several years

before the business becomes profitable.


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