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Are personal pensions priced out of the market?

The FSA recently published a consultation paper, Suitability Standards For Advice On Personal Pensions, in which it proposes dropping the requirement known as RU64.<

The PIA introduced RU64 in the run up to the start of stakeholder pensions in April 2001. It said firms must take account of the low charges and preferential terms under stakeholder when selling personal pensions. Firms were told that consumers should be able to convert personal pensions to stakeholder without material disadvantage – in effect, without penalties.

RU64 had the effect of reducing charges for personal pensions to the stakeholder benchmark.

The need to take account of stakeholder has been established in the FSA’s conduct of business rules. When recommending a personal pension, an adviser must explain in a suitability letter why the recommended pension is at least as suitable as stakeholder.

But the FSA now thinks there is evidence that the forced benchmarking of personal pensions against stakeholder plans has led to fewer advised sales of personal pensions to lower-income consumers and the contraction of the market for personal pensions.

The removal of the requirement will, in theory, give providers more flexibility in the design and pricing of personal pensions. But, in practice, it will mean an increase in charges over the current stakeholder limit.

The Government recently increased the price cap on new stakeholder pensions from 1 to 1.5 per cent for the first 10 years, reducing to 1 per cent thereafter, so providers already have scope to increase their charges for personal pensions to an equivalent level.

But the fact that the FSA has not waited to see if this increase in the price cap will result in an increase in personal pension charges seems to imply that it agrees with many providers that the Government recently lost an opportunity to put stakeholder charges on a better financial footing. Rather than increasing the charge to 1.5 per cent for the first 10 years, the Government should have kept it at 1 per cent but allowed a charge on each contribution of, say, 5 per cent, allowing the timing of charges to more accurately meet the incidence of expenses incurred by providers.

Ironically, giving providers the ability to increase charges on personal pensions will do little to expand sales to lower-income consumers. Even if providers, having increased their charges, choose to pay away part to advisers in the form of increased commission, there is nothing to indicate that advisers will sell to consumers who are likely to benefit from the pension credit at retirement. Advisers appreciate that selling personal pensions or stakeholder will generate future complaints when low earners see their savings have had the effect of subsidising the pension credit. For this market segment, advice can only come on the back of employer contributions to a group personal pension or stakeholder.

The FSA’s consultation paper states: “In March 1999, the PIA issued RU64 to guide firms in the lead up to the introduction of SHPs.” There was more to this. Providers, through the ABI, rightly sensing a pension planning blight, approached the PIA for guidance but failed to think about the likely answers, thereby committing the cardinal sin that you should never ask a regulator or Government department a question unless you know the answer and are seeking confirmation or are prepared for the worst.

In the rush to secure business, many providers launched stakeholder plans, some with charges below 1 per cent, even though they were unhappy about the price cap. Perhaps they thought this approach would find favour with Government ministers.

Some providers even introduced considerable flexibility on fund choice, including external fund managers. The effect was to make their personal pensions, on which they hoped to make a higher profit margin, almost indistinguishable from stakeholder.

Providers must think carefully about the possible impact and consequences of this consultation paper on their businesses and strategies before regarding it as a success.

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