Our panel consists of: Mark Birks, asset accumulation leader, Royal & Sun Alliance; Steve Burgess, head of pensions marketing, Axa Sun Life; Tony Reardon, pensions marketing director, Zurich IFA How many stakeholder providers do you predict there will be in a year?
Birks: What would you have predicted 12 months ago? Certainly not 47. Frank Field is amazed there are more than two or three. Our view 12 months ago was that if you do not offer stakeholder you might as well pull out of the market. It is a shop window product that invites customers into the shop to see what else you have. Obviously, 46 other providers agree.
I would expect to see a lower overall number in 12 months as some providers exit but we may see some new joiners. I would say a total of perhaps 20-30.
Reardon: The same as now, excluding the effect of mergers and acquisitions. You have to remember that providers are not just stakeholder providers, they may market all sorts of products such as unit trusts, protection plans, etc.
Burgess: We are already starting to see some consolidation and the effective exit from the stakeholder deadline market by one or two providers. Some providers will try to position themselves in a more exclusive bracket, hoping to pick up more lucrative non-stakeholder group business – GPPs and occupational schemes.
However, I believe that providers that can handle the full range of group business, including stakeholder, will ultimately triumph because many employers looking to restructure old legacy schemes will not want to split their business between providers.
Having a broad group product proposition will be the only way to be a major player in this market in the next three to five years and I cannot see more than five or six providers achieving that status.
Is it time that initial commission was shelved across all pension products?
Birks: The fallout from recent decisions by some providers to cut their commission is still settling. I am surprised that the months of planning prior to the launch of stakeholder have all been torn up in such a hasty manner. However, IFAs are coming to the conclusion that indemnity is not viable and are redrafting business processes to cope with its gradual removal.
At R&SA, we profit-tested indemnity along with other commission types. We built an underwriting model to test likely scenarios and mixes of premiums, commission and terms. There were some bits of the jigsaw we did not like. Ironically, level commission is as bad as indemnity but overall the mix indicated we could pay indemnity and make a profit.
Getting advice will become very difficult if indemnity is removed across all products. We could be about to see the impact of low stakeholder commission translating into thousands of employers incurring Opra fines because IFAs could not afford to market them and target employers.
We made a decision not to pay indemnity commission on stakeholder and that was the right decision. We will pay indemnity on non-stakeholder products but not at the rates that we have seen recently. The processes have to support your financial assumptions, they dictate how much it costs you to run the pension schemes. But the current Myners 2 report could focus this debate to a speedy conclusion.
Reardon: No. There is no likelihood of initial commission being shelved while the other method of paying for advice – through fees – is less attractive to the client. Currently, the client pays contributions into the pension plan and gets tax relief on those contributions. Commission is paid to the IFA by the provider through the charges of the pension plan. In effect, the client obtains tax relief on the cost of advice.
The alternative is for the client to pay a fee to the IFA out of taxed income. There may also be VAT at 17.5 per cent. Under this method, the pension plan will have a lower charge because no commission will be payable. The lack of tax relief on fees and the VAT make this alternative a non-starter. The commission route is better.
Many clients simply could not afford to pay an up-front fee to the IFA equivalent to the initial commission payable (and needed to remunerate the IFA for the advice given on what is usually a complex matter).
The only circumstances in which fees might be better is when someone else is paying rather than the client. In some cases, employers are prepared to set up pension plans where no commission is payable but the employer will be paying a fee to the IFA to cover the cost of giving advice to the members of the pension plan.
Do not confuse initial commission with front-end char-ges. Pension plans these days tend not to be front-end-loaded but can still allow for initial commission to the IFA. There is evidence these days of IFAs spreading commission and taking trail fees to cover the cost of servicing and ongoing advice.
Burgess: No, not yet for a number of reasons. First, initial commission on regularpremium pension products has reduced dramatically over the past 12 months. Whether that is something you welcome or lament, it has certainly forced advisers to restructure their businesses.
This is proving to be a massive driver of change in the industry already and I am not sure that removing commission altogether would lead to a better outcome.
Second, if we have any ambition for a truly professional industry, then we have to accept that advice does cost money and is worth it.
Finally, many consumers of financial advice are not yet ready to accept that they should have to pay for advice out of their own pockets, and until they are, commission will be a preferred mechanism for them as well as for advisers.
What should the Govern-ment's benchmark for dec-laring stakeholder a success be set at?
Birks: Last year, we predicted that for every £100 of new pension premiums written in 2001, only £10 would be pure stakeholder. We also anticipated massive growth in the group pension market as a whole. That is why we are concentrating on non-stakeholder products and created a completely new, repriced range for the 1 per cent world.
The recent ABI figures for the second quarter show that £634m of regular individual pension premiums were written by the industry, of which £64m were stakeholder premiums.
When the stakeholder proportion rises over half, then you can claim success, assuming the intended people are buying it. However, the stakeholder effect has put pensions in the public eye and prompted employers to take action and these are two big wins for Government.
The real issue will be how many switch cases effectively get double-counted. Looking wider than that for the first half of 2001 the total of all new premiums (excluding defined benefit and group risk) was £2,276m of APE compared with £107.9m of stakeholder APE, making just under 5 per cent. The number of policies being reported suggests a great success but they included an existing occupational scheme switch.
You can guarantee the Government will be desperate to use whatever benchmark it can to prove success. It has a vested interest in it being successful. It will not then have to make contributions compulsory. Much informed debate is currently under way on the issue of compulsion, we feel that is still potentially three to five years away and will be focused on employers.
Reardon: The Government set the benchmark in its Green Paper, A New Contract for Welfare: Partnership in Pensions. The outcome it wants to see is: “Overall, the proportion of GDP going to pensioners is estimated to increase from about 10 per cent now to about 12 per cent in 2050 at current levels of compulsory and voluntary savings. We expect the measures set out in this Green Paper to encourage a significant increase in the level of voluntary saving. Over time, we expect this balance to change so that 40 per cent will come from the state and 60 per cent from the private sector.”
The Green Paper has already had an impact in that charges on pensions plans have reduced. However, it would be rash to make statements about the success of stakeholder on the basis of six months' activity. 2007 could be the earliest date by which we'll see the next significant shift from state to private provision. At that time, the S2P should have changed from earnings-related to flat rate, with greater numbers of people contracting out through individual plans.
Burgess: The only benchmark that really matters is where everyone is adequately provided for in retirement. Realistically, I think stakeholder will struggle to encourage enough people to even start to contribute towards a pension fund, let alone ensure that the contribution is anywhere near adequate.
So, leaving aside an unattainable ideal, I think a reasonable benchmark in the real world would be, say, 85 per cent of the working population covered by some kind of pension contribution by the end of 2004. The real work would start then, to encourage those people to start saving adequate amounts and this would require a combination of carrot and stick measures but that is another story.
Should the regulator review whether pension providers which pull out of the market due to admin overload are fit to re-enter?
Birks: Leave it to self-regulation. The market will decide. The whole basis of deciding to enter the stakeholder world was predicated on the basis of being able to run your business at a profit.
The FSA has asked all stakeholder managers for their business plans and J curves (profit forecasts). Pulling out of the market effectively implies the model has broken down. So before re-entering,I would think a provider would initiate some external sanity check to reassure potential customers, intermediaries and the providers' own shareholders.
Reardon: Not if those providers pull out of the market voluntarily and where their clients' pension funds are not adversely affected.
Burgess: I would defend the right of any provider to determine how, within sensible boundaries, it manages its own business. We are already a heavily regulated industry and, although I accept that regulators have a crucial role to play in ensuring rules are obeyed when writing business, it is surely a step too far for them to have power over how many players there are in the market at any one time. There is a real danger that this could be anti-competitive. A far more effective regulator in these circumstances is the market itself. In other words, I think advisers and custom-ers will make up their own minds about how providers behave and act accordingly.
What will the average stakeholder charge be this time next year – how low can it go as the market matures?
Birks: Charges are very much geared to the nature of the scheme. The underwriting model we built to help us forge our stakeholder strategy has found a new operational life in testing special deals.
If a scheme has big existing funds which are switching over and the IFA is taking nil commission or fund-based and there are high average contributions, then expect anything around 0.6 per cent, in our case that is with fund tiering. Once the member's fund in the scheme exceeds £100,000 the charge drops to 0.3 per cent on the whole fund.
However, the likelihood of that scheme being placed as a stakeholder is remote. Contracted-in money-purchase schemes and GPPs are the preferred route for IFAs and will remain so for some time to come.
At some stage we could see some new vulture entrants to the markets seeking transfers by offering very low charges, similar to Pep transfer marketing. This is the doomsday scenario. These are clean contracts with eight to 10-year paybacks and a tempting offer of a low management charge may lure customers away. Who is to say the charge will always stay low?
One thing is certain – you should not buy on the basis of charges alone. You can buy a car for £50 but I would not fancy a drive in it.
Reardon: Charges generally will remain at around 1 per cent a year. Naturally, charges for some stakeholder (group) schemes may be lower, for example, where employers and employees are paying reasonable contributions. Even when the market matures, charges will not necessarily drop. Service and investment performance will be just as important as they are now.
Burgess: There are a number of ways of defining charges. The most useful, in my view, is to consider the net charge that a provider takes to cover expenses, contribute towards overheads and – if you are lucky – make some profit eventually. This charge can then be loaded with commission, if required, to give the gross price to the customer.
Providers' net charges have been forced down by the demands of commission, and probably hover between 0.5 per cent and 0.6 per cent right now. I really cannot see this moving much lower as providers also have to bear the heavy burden of new business strain when they pay out initial commission which has a financing cost of its own.
Mark Birks,asset accumulation leader,Royal & Sun Alliance
Steve Burgess, head of pensions marketing,Axa Sun Life
Tony Reardon, pensions marketing director, Zurich IFA