Christmas 1998. Log fires burning in an open hearth. Tinsel and baubles on
a brightly twinkling tree. A comforting glass of mulled wine. One year to
the 21st Century. And a good book – the Government's Green Paper on the
future of pensions in the UK. It was a Christmas as never before.
Of course, we knew about stakeholder. It was in the manifesto. But the
surprise – and aren't surprises nice at Christmas? -was the new concept for
state pension provision.
Out went the long established approach of compelling employees towards the
final-salary structure of Serps.
In came an acceptance that the state's key role is ensuring the lower-paid
have better financial provision in retirement. The state scheme would be
the redistributive mechanism to achieve that objective. The only downside
to this sensible concept was the creation of a new TLA (three-letter
acronym) – S2P.
The Green Paper also gave greater emphasis to private provision, with the
overall objective being to reverse the current split between private and
state provision from 40 per cent private and 60 per cent state to 60 per
cent private and 40 per cent state. Stakeholder and occupational schemes
would deliver a positive result for people in the private sector.
Eighteen months of continuous consultation later, the Government's
scorecard has some notable successes. The charging structure of personal
pensions was transformed without a single word of primary legislation – how
many IFAs now sell low transfer value personal pensions in the wake of the
FSA's Regulatory Update no 64?
In addition to changing the charging structure, the price of personal
pensions has come down significantly. Prices have only been able to drop
in anticipation of reduced costs arising from the much greater use of
To that extent, the Gov-ernment has been lucky in pushing to a charging
level which would not have been attainable a few years ago.
Commission levels in the increasingly competitive group market have been
falling for a few years. IFAs have responded strongly to the promotion of
GPPs into a widerrange of employers than had previously been reached.
The market grew by 25 per cent during 1999 (in newAPE terms), following
pre-vious double-digit growth.
Consultation has seen many of those schemes provide exemption for their
employers from having to offer stakeholder and the acceptance by Government
that good GPPs can have just as much merit as occupational schemes in
helping consumers in the UK towards a better retirement.
The Government's newfound willingness to embrace GPPs was a very welcome
change and one which the financial services industry must ensure passes the
With IFAs encouraging employers to contribute 3 per cent or more to an
employee's pension pot, there is everyreason why GPPs should be successful
as measured against the Government test of imp-roving real – and
value-for-money – pension provision.
A key issue for consultation was, of course, the provision of advice.
Could the cost of advice be loaded into the stakeholder product?
The “no” from the Government was entirely consistent with its drive for a
commoditised stakeholder product. But it opens up scope for the sale of a
personal pension which can allow for advice costs – and do so more
tax-efficiently through tax relief and potentially VAT differences.
Of course, both the price and commission will still be lower. And the
market will have room for both stakeholder and personal pension products,
depending on the business plans of the IFAs who will still be key to
delivering success in significant sections of the market.
The “no” to advice also opens up the risk of people making the wrong
decisions because they have not taken advice. The catalogue of consumer
risks, starkly drawnin the FSA's discussion document on decision
trees,makes that plain.
It must be tempting to downplay those risks to deliver a positive result
for the majority of people but the needs of a significant minority also
It would be wrong to be gloomy about the changes being made at present.
The draft tax regime, for example, represent a major development from the
Government which will, for the majority of consumers, deliver a simpler,
less expensive administrative environment – again helping to deliver lower
The five-year presump-tion and cessation rules inparticular will also
deliver significant tax planning opportunities, especially for
high-net-worth clients paying over £3,600 per annum, and leading to
advice well worth paying for.
It is easy to feel that, after 18 months of active consultation, we should
now know all the ground rules. But we are far from that yet.
At the time of writing, the tax regime is still to be confirmed, with the
long awaited policy decision on concurrency still to be announced.
Most significant of all, the selling regime which will apply is the
subject of anFSA discussion paper ahead of an FSA consultation paper in the
Stakeholder will undoubtedly launch in April 2001 and is on track to do
so. But is it right to try to deliver the entire regime by October 2000? To
have consultation on something as crucial as the selling regime in such a
short timeframe can scarcely leave sufficient time to make the consultation
Deferring the ability to sell stakeholder until January – linked to a
Government consumer campaign on the value of saving for pensions generally
– could represent a more sensible approach, with significantly less risk
of launching into a flawed environment.
Either way, it will be a long hot summer.