View more on these topics

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

company.

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

fourfold.

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

performance.

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

sell.

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.

Recommended

&#39Business on the net set to save IFAs £37k a year&#39

Business-to-business dealings over the internet will save IFAs anestimated £37,000 a year, according to London Economics.In a report commissioned by internet-based company GroupTrade, theconsultant says online dealings will revolutionise the way business isconducted in the UK.Small businesses in the UK will save between £18bn and £24bn a year.The figure for this year is set at […]

Why Government fears coming clean over with-profits

If the Government wants to ban with-profits from stakeholder, it shouldbite the bullet and say so publicly. It would have to justify the decisionand back its arguments with facts and figures, hopefully explaining why toParliament, the pension industry and consumers.As a result, ministers would find it difficult to boast about extendingconsumer choice when they are […]

Panorama failed to take in whole picture

What a pity about the BBC&#39s Panorama Mortgage Timebomb programme lastweek. I was expecting a serious in-depth analysis of endowment policies,about what percentage of them are likely to fail to repay the mortgage andan actuarial comparison between the total costs of endowment and repaymentmortgages.Instead, we were treated to a number of examples of the failure […]

Assuresoft and Misys in signing battle to take on Exchange

Trading platforms Misys and Assuresoft are racing to sign up productproviders in a bid to match and overtake current leader the Exchange.Misys now has 11 providers offering products on its m-link service,whichis currently rolling out to IFAs nationwide.The providers signed up by Misys include National Mutual, Scottish Mutualand Permanent Insurance which have yet to join […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment