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A Consumer&#39s View

Would you set up a business to sell a product where the gross profit margins were fixed at 1 per cent, where you were unlikely to show a profit on the business within 10 years, where the competition is fierce, where there is little or no customer loyalty, where a significant proportion of working capital must be tied up in reserves and where there is effectively only one criterion for judging the worth of your product? Probably not, when you put it like that.

But that is precisely what our major life companies are planning to do as they scramble to compete on stakeholder pensions and the effect of stakeholder will be to separate the men from the boys, forcing a rash of shotgun marriages and takeovers as weaker companies find themselves unable to survive in this new environment.

No longer will life companies be able to lock in investors with heavy early redemption penalties on pension policies because these are banned under stakeholder regulations.

In addition, because there will be no penalty for switching, investors will become much more critical of poor investment performance and will vote with their feet.

Life companies that do not perform at least as well as the average or an appropriate index will find this expensively acquired business flying out the window.

The stakeholder pension market will be dominated by IFAs because small employers who probably know little more than the tea lady about pensions will be forced to take advice.

IFAs will have no compunction in switching employer clients from a poorly performing life company to one which has done rather better because the commission on stakeholder pensions is likely to be small and most will be charging fees.

Annual investment reviews could prove a useful source of new income for IFAs specialising in pensions.

The effect of stakeholder will be widespread. Very few personal pensions or more profitable pension contracts are likely to be sold once employers and the self-employed can buy a product with maximum charges of 1 per cent of the fund and total flexibility.

Moreover, once the customer has experienced the dramatic effect that lower charges can have on total returns, there will be increasing demands for a better deal on other contracts such as long-term savings and lump-sum investments.

The annual battle for savers’ Isa money has already resulted in huge discounts on the front- end charge on unit trusts and it is only a matter of time before no-load funds appear.

We have already seen the success of tracker funds with their low initial charges. Unless the investment managers pull their socks up, an increasing proportion of investors will opt for a low-charging index-tracking fund rather than putting their faith in the expensive and decidedly dubious skills of the vast majority of fund managers.

The effect of stakeholder on the pension market will be fast and dramatic. Most of the major players have said they will be offering existing pension policyholders the facility to switch into a stakeholder. For some companies, the fall in profits as clients switch to a low-charging product will cut margins to painful levels.

All this has important implications for shareholders in life companies. Those companies which decide to offer stakeholder pensions will need deep pockets to carve out and maintain a substantial presence in this market.

With endowment-linked mortgages totally out of favour and generating little or no business at all and savers preferring to invest in Isas rather than long-term regular savings schemes, there is not much left that is profitable for the life companies to sell.

Even a big general insurance portfolio will be no guarantee of success since competition from the direct insurers has driven down premiums and profitability in this sector, too. Customer loyalty is now virtually a thing of the past, with motorists and householders regularly shopping around at renewal for a better deal.

To survive, life companies will need to be big, financially strong, efficient, lean and with a range of products which offer better than average investment performance, are simple, good value for money and easy to sell direct.

Policyholders of mutuals and shareholders in the quoted life companies would do well to bear this in mind. Not many companies jump out at you as satisfying these criteria when you think about it.

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