Eight years on and there have been changes. Traditional personal pensions are viewed by many as something held by enthusiasts of the Sinclair C5. The stakeholder pension bubble grew, then burst. Multimanager personal pensions and Sipps are now viewed as more of a mainstream solution. Platforms have come over the horizon, with a range of ways of providing for retirement.
The net effect of all of this is a range of options to choose from in terms of products and investment solutions, financial planning tools, technology solutions, funds, asset allocation and fund strategies, charging options, ways of funding the cost of any advice and potential costs to the end client. At a time when we all must clearly focus on the outcome to the consumer, all this choice must be a good thing.
One thing that has not changed is the debate over price. Increased activity around Sipps and platforms has reignited this. Any decision to buy must be accompanied with an informed decision about what you pay and what you get in return.
There are lessons to be learned from past experiences. History is littered with poorly informed assumptions. A theme in years gone past was that stakeholder pensions are cheap and good, multi-manager pensions are expensive and bad. Recent commentary suggests that Sipps and platforms are facing the same misguided comparison.
The biggest mistake that is commonly made is failing to consider the overall effect of charging structures and associated benefits. Again, history shows that it is an easy mistake to make. The market has gone through phases of dismissing highly competitive products with a superior range of services simply because they included a charge that had fallen out of favour. As an example, in the run-up to the 2001 version of stakeholder pensions, we went through a bizarre phase where traditional personal pension products with no exit or premium cessation charges were championed, even though 10 per cent of every premium (5 per cent bid/offer spread and 95 per cent allocation to units) was deducted to pay for this privilege.
As the overall impact of charges is the key measure, all charges and all approaches to charges should be carefully evaluated. Furthermore, to avoid making false assessments, it is crucial that individual charges are not evaluated in isolation. A simple example will help to demonstrate how easy it is to make false assessments about different charge structures.
The table below shows the outcome (based on 7 per cent a year growth) of five different approaches to charges for a £50,000 single premium invested over 25 years. The example has been structured so that each product produces the same result at the end of a 25-year term. So, like it or not, they are all equally good over 25 years, irrespective of how much a particular charge approach appeals.
We have to accept that all clients are different and that different approaches may well be justified in specific but different circumstances. Also, simple things such as fund selection affect the overall price. Recent industry comment has included comparisons on price where the underlying funds and adviser remuneration selected were different.
The regulator stipulates that comparisons should be clear and fair. This must involve consideration of the impact of all charges, the adviser remuneration and a sound understanding of the benefits, services and solutions available to the consumer. All part of the suitability process.
Billy Mackay is head of marketing at Skandia