View more on these topics

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.


Magnum hedges its bets with bull and bear fund

Nassau-based offshore investment company Magnum is hedging its bets with its new bull & bear fund.Bull & bear is a fund of hedge funds aimed at high net worth individuals and institutional investors such as pension fund managers and banks, with the minimum investment limit being $100,000.The fund aims to avoid any volatility in the […]

Equitable accused of putting a blockon information

Consulting actuaries Punter Southall has accused Equitable Life of holding back information which could be beneficial to its members.The firm says it has pushed Equitable for information on a number of issues on behalf of its clients and found that even good news for members is not being disclosed. It says bonus details are not […]

Small hope of exemption

For many of us, stakeholder pensions have been a feature of our lives ever since the publication of the Green Paper over 18 months ago.Most big companies which have regular contact with their professional advisers are well aware of the impact of stakeholder on their businesses. It is only now, however, that significant numbers of […]


At the start of August, the FSA published a consultation paper number 61 on The Regulation of Stakeholder Pensions. At the same time, it issued a press release which included this key point – when there is an advised recommendation to buy a traditional pension (including one linked to a group personal pension), the suitability […]


News and expert analysis straight to your inbox

Sign up


There is one comment at the moment, we would love to hear your opinion too.

  1. VdGo69 lagrnzegorlj, [url=]mxcmqgpfjzsa[/url], [link=]ziyzijdbigmm[/link],

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm