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A long hot summer with the ground rules

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&#39s 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&#39t 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&#39s 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&#39s

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&#39s 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&#39s newfound willingness to embrace GPPs was a very welcome

change and one which the financial services industry must ensure passes the

three-year review.

With IFAs encouraging employers to contribute 3 per cent or more to an

employee&#39s 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&#39s 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

need consideration.

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

production costs.

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.


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