One success the Government will be able to claim for its stakeholder initiative is that, well before the first stakeholder contribution is collected, it has succeeded in changing the shape of pension charges.
There are probably a few remaining flat-Earthers out there who think you can still sell pensions with six different forms of charges operating in different directions and largely cancelling each other out. But the vast majority of providers now offer as their main corporate pension product something much simpler from the new 1 per cent world.
So what should happen to existing business? Should it stay where it is or should it join this brave new world? Here, I will look at the pros and cons of switching from the point of view of the different parties likely to be involved – the employer, employee, provider and adviser.
I will be referring to “old terms” and “new terms” simply for the sake of brevity and not in any judgemental sense. First, there is one point which is fundamental to the debate but which is often overlooked – the fact that a legal contract exists which will almost certainly limit the nature of the change. For example, you could probably switch an existing group personal pension on old terms to a GPP on new terms but it is unlikely that you could switch a GPP to a stakeholder plan, even a personal plan, on new terms without getting the consent of the members to changing the terms of the original contract they made with the provider.
Where an employer is opening up an existing scheme to employees previously not covered, there are essentially two choices – put the new entrants in on the old terms or go for new terms. The latter is likely to be the line of least resistance since it will avoid awkward comparisons with stakeholder terms – especially after they acquire an even higher profile as a result of Government advertising and media comment.
If the new members are on new terms, is it feasible to keep existing members on old terms? Probably not but a good employer would want to consider the impact on members' benefits of changing the terms.
We will return to this point later but what is worth considering here is the view of the employer where not all employees will be affected equally or in the same direction. Does this mean some should stay on old terms and some should move to new terms? In many ways, this is the worst possible option since it involves explaining to affected employees the rationale behind the selection process.
These should be the people most interested in the decision since they are the ultimate beneficiaries. What will motivate their wish to change?
Will it be a rational decision based on benefit outcome, in which case their preference will be for the route most likely to produce the best pension even if that is the old terms? Or is there a more instinctive response at play leading to a preference for a simpler contract which employees better understand and which may, at least in the short term, offer improved access to and presentation of information in a way which they value?
I suppose it is unlikely we will ever see pensions presented as a fashion statement but, perhaps at some level, there will always be a preference for the new over the old, even if the new is not necessarily better.
The provider also faces a dilemma. The old terms are likely to be financially more attractive and credit may well have been taken for their assumed profitability. Moving to new terms with lower or later profitability may not adequately reward the owners of the business (shareholders or with-profits policyholders) who probably financed the writing of the business on the original terms.
Fortunately, things are not that one-dimensional and providers also need to consider other issues such as the cost advantages of not having to run their business on a plethora of different terms and conditions which only the departmental Methuselahs can remember.
If a scheme is growing in size, a change to new terms can be a win-win situation in that the provider retains the scheme at a much bigger size and the employer gets the uniformity which makes life easy.
Of all the parties to the decision, advisers probably have the most difficult role in that they have to weigh up all these conflicting points of view in the advice they give. In particular, they cannot ignore the question of whether the member will be better or worse off.
Many old terms have, in the later years, a charging structure which is very low (or may even give back charges via loyalty bonuses) compared with stakeholder-style charges which can be very high in sterling terms in the later years.
If this were a comparison based around a single point, such as at the selected retirement date, you could work out some numbers to support your advice but, ideally, you need to compare the terms at all future points – clearly an impossible task.
At one point, it was thought the regulators might provide some assistance by pointing out ways in which the comparisons might be done but none has been forthcoming and it now looks unlikely to appear. In that case, you are probably best to ignore any attempt at precision in the numbers game and concentrate on the more generic points raised above.
Switching to new terms may be thought of as an attractive option by the employer and employees but it is the role of the adviser to point out some of the less obvious consequences, especially the fact that new and simpler does not necessarily mean better as far as the emerging benefits are concerned.
Once that is understood and accepted, it should be possible to discuss the pros and cons in a wider context.