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A pension policeman&#39s lot is not a happy one

Given that the Occupational Pensions Regulatory Authority has limited resources, no records of schemes being designated and no means of checking which firms have more than four employees, the only method of policing stakeholder compliance appears to be employee whistleblowing. Do the panel feel this is adequate? – Name and address supplied.

NB: Whistleblowing will only work if employees are aware of stakeholder pensions and the requirement that employers designate such schemes. I suspect that Opra will pick on a few employers and make examples of them. That should cause a rethink among those employers who do not take it seriously.

AB: It appears to be the only route available as a central register would be unworkable. Time will tell.

SB: Opra may have limited resources and, therefore, restricted means of enforcing the employer access requirements but I would be very wary of taking any comfort from this if I were an employer.

Whistleblowing by employees would be one way in which non-compliance could be brought to light but there are many others, not least the obvious one of requiring employers to make a simple statement that they have complied with the law. I doubt that many would take the risk of making a false statement.

NH: No, it is probably not adequate unless Opra is intending to increase its resources to police the issue. However, the last thing we want is more legislation that further complicates and adds cost to the product.

SR: Parliament made Opra a reactive regulator for Pensions Act 1995 purposes and has followed this through into the stakeholder legislation. I understand the reason for this is that to be proactive would require a huge team. Can you imagine the cost of sending a trained investigator into the workplace of every employer with at least five employees? The cost would almost certainly be paid out of money that would otherwise go to fund pensions. I think the whistleblowing route is the only practical one but it would help if people know it exists.

I have already proposed in the columns of Money Marketing that the October 8 episode of Coronation Street should feature an Opra investigation into Mike Baldwin&#39s factory. That is a serious suggestion.

We now have 1 per cent charging contracts with external investment links. What justification is there for continuing to sell personal pensions charging more than 1 per cent? – Name and address supplied NB: None that I can think of. The only success that stakeholder pensions have produced is forcing down of personal pension plan pricing. This is good news for the consumer but, unfortunately, bad news for any IFA firm which cannot fit their own pricing policy into the 1 per cent environment.

AB: Advice is the major justification. Clients should be able to pay for advice via charges out of the product. A wider choice of investment links will only be available through contracts charging in excess of 1 per cent and, for those cli-ents that need these extra funds, advice will be critical. Fees to IFAs will be higher than a 1 per cent cap can meet.

SB: I am not in favour of pension contracts being sold or modified without advice. There are a number of factors that individual investors need to take into account when establishing their financial affairs and price is only one of them.

The list of complexities surrounding individual pension decisions is quite daunting – the existence of so many existing retirement annuity contracts which are uncapped but could become capped with a personal pension held in tandem, not to mention the likelihood of higher tax-free cash; the obvious tax-free cash advantages that apply to personal pensions first established between July 1988 and July 1989 but do not apply to later personal or stakeholder pensions; the generous and much-missed carry-forward and carryback rules which still apply to retirement annuities but are lost to other personal pensions; etc, etc, etc.

All this, and the charging structures of the contracts themselves, means that people who are already saving through one of the many existing forms of individual pension are in danger of making costly mistakes which they may come to regret later on if they do not understand the issues. To alter existing pension arrangements without taking advice from a professional adviser does not seem to me to be a sensible course of action.

For people with no existing pension arrangements, the pension options may be more straightforward but their particular financial position may not be. It is important to ensure that, when pensions are sold, they are suitable investments for the individuals concerned. It would be nice and easy if pensions were guaranteed to be suitable investments for all but the plain fact is they are not. For many people in this country who may be considering saving for the future, I am sorry to say there are better and more suitable investments than pensions. This means pensions have to be sold with proper and thorough advice.

I know this is a long-winded answer to the question but, if the full advice process can be met within the 1 per cent cap on charges within a particular pension product, then good. But if it cannot,I would question strongly whether it is justifiable to distribute the pension without first taking the care to understand and appreciate the customer&#39s financial position.

ND: Personal pensions still have a place, especially where product providers have restructured their product terms to meet or even beat the stakeholder minimum standards. But stakeholder schemes are likely to be a good choice for the majority of people, especially those without access to an occupational scheme and who need to save for retirement.

FSA rules reflect this and require any adviser who recommends a personal pension to show why the recommended product is at least as suitable as a stakeholder scheme.

This philosophy follows through into the rules for marketing a group personal pension in preference to a group stakeholder scheme by direct-offer financial promotions.

The FSA does not intend to publish a list of the circumstances in which a personal pension might be considered to be at least as suitable as a stakeholder scheme. This is not the regulator&#39s responsibility. It is down to advisers to justify the reasons for their advice. After all, this is what the customer is paying for.

NH: Few and far between is probably the answer. Of course, it has been possible to buy personal pensions with annual fees below 1 per cent for a considerable time – long before the advent of stakeholder – though not necessarily stakeholder-compliant.

Many group personal pensions have been established on this basis although they have never been the market&#39s favourite.

It is difficult to see, at this stage, how the market will settle down. Who would have thought five years ago that life companies would be slashing their charges to the bone to stay in the individual pension market?

It might be that, without the margin to provide advice in stakeholder and a reluctance by the general public to pay fees, some investors may be prepared to pay higher fees to cover the cost of advice and gain access to funds that would otherwise not be available through 1 per cent contracts.

SR: The issue here is about paying for advice. If there is enough margin to pay for the advice the client needs, fine. If the client is willing to pay a fee, fine. If neither of these is the case, then the client has a choice – have a charge above 1 per cent or go without the advice.

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