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A consumer&#39s view

Benefits consultant Mercer has put the cat among the pigeons by spelling out two unpalatable truths which will upset many in the pension industry as well as the Government.

The ABI has been promoting its members´ interests, pushing hard for an increase in the 1 per cent charge cap on stakeholder pensions. The argument is that a 1 per cent maximum does not provide enough for salespeople and other intermediaries to be remunerated to give advice.

Not so, says Mercer partner Dick Strattan. He has been pointing out that thousands of group pension schemes are run effectively, with the provision of advice to employees, on charges considerably less than 1 per cent. “Many employers are being charged well below the 1 per cent cap with 0.5 per cent common for reasonable-sized schemes,” he says.

He goes on to say that if the pension funds under management perform well, the 1 per cent cap becomes irrelevant, since the fund manager is earning fees on an increasing amount. He also makes the obvious point that in the current environment, with low interest rates and low investment returns, an increase in charges would prove unacceptable to pension fund investors, balking at having to pay fees to managers who lose them money.

But the comment that will really get the Government and the industry wound up is the acknowledgement that stakeholder pensions can be mis-sold and that, for most employees in the Government´s target market, stakeholder may well be totally unsuitable.

These obvious truths have been spelled out many times by journalists but industry figures of Strattan&#39s calibre have been silent on this point.

Strattan is delightfully politically incorrect. “The (ABI) proposals suggest charges are raised to cover the cost of persuading more people to save. The danger is that this extra revenue would go into the pockets of salespeople to provide “advice” and to sell products to people who don´t need them. If we&#39re not careful, we could find ourselves facing yet another misselling scandal.”

What pension salesman, faced with the possibility of earning a fat commission, is going to point out that for those on average earnings or less, investing in a stakeholder is a total waste of money, as it simply makes the individual ineligible for free means-tested benefits?

He adds: “It is not whether the charge is 1 per cent or 2 per cent that encourages or discourages people from buying stakeholder pensions. It&#39s that they can&#39t afford the contributions or would rather spend their money on something else.”

The Government&#39s own figures show that of the 637,000 stakeholder schemes set up to date, 80 per cent are “empty”. The real reason why the lower-earning half of the population have no private pensions is because many employers and most employees cannot afford the contributions.

The only way the Government is going to get these people to save is to make contributions to a stakeholder mandatory. Without compulsion, stakeholder pension schemes are likely to remain empty.

As a final aside, Strattan observes that in the retail market, IFAs are getting round the problem of low charges by selling personal pensions which are not capped. He refrains from commenting on whether or not this could be regarded as misselling.

The ABI&#39s contention that maximum fees of 1 per cent on stakeholder pensions leaves no room to provide advice may well become irrelevant fairly soon. If stockmarkets do not pick up substantially – and fairly quickly – a large raft of the life insurance industry will be forced to stop taking on new business.

It is unfortunate that stakeholder pensions were introduced just as the stockmarket collapsed. But for the lower-earning half of the population, who cannot afford to take risks with what little they can afford to save, it has always been debatable whether a unit-linked pension scheme is a suitable investment vehicle for what is likely to be the bulk of their savings.

A with-profits contract would be far more appropriate for most. But the Government effectively ruled out with-profits for stakeholder by requiring the with-profits fund to be set up in a way that most life companies have deemed unacceptable. If the Government is not prepared to make pension saving compulsory, then perhaps it should just quietly let stakeholder die.

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