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Charge cap does not fit IPAs

It is time for a rethink as IPAs run the risk of missing the stakeholder bus. During July, the Treasury introduced the concept of IPAs and announced plans to launch this new product in time for stakeholder pensions in April 2001.

The announcement also suggested IPAs would be particularly suitable for stakeholder pensions. Given the closeness of this proposal to Skandia Life&#39s multi-manager structure, this encouraged me to spend some time trying to fathom out how the Treasury had managed to overcome the problem of accommodating outsourced fund management within the stakeholder pension charge cap.

After all, if it had found a solution, then this would clear the way for multi-manager products to play a big role in the stakeholder market.

Once again, I returned to the drawing board to try and work out how we could make this happen. Skandia Life&#39s range of funds probably represents a good starting point. It is representative of the funds generally available in the unit trust market and the preferential dealing terms are probably similar and may be better than the terms that would be available via IPAs.

Based on our full range of funds, the average total expense ratio (after allowing for the preferential dealing terms enjoyed by an investor as big as Skandia Life) for Skandia Life&#39s pension funds is 1.06 per cent a year. As this is the raw fund management cost and this exceeds the maximum charge for stakeholder products, it suggests that IPA fund choice will need to be restricted to cheaper funds.

To work out which funds might feature in an IPA sold to stakeholder pension members it is necessary to work out how much of the 1 per cent stakeholder charge can be spent on fund management.

Although views will vary, in even the most optimistic models, where admin costs are tightly controlled, it is difficult to make stakeholder work if more than one-third of the charge (that is, 0.33 per cent pa) is spent on fund management. This is simply because the absence of flat-rate admin fees means providers need as much of the charge as possible to cover basic admin and distribution costs.

If 0.33 per cent a year is taken as the amount available to spend on an IPA (it might even be less if a stakeholder providing access to an IPA incurs extra admin costs), it is difficult to see how this new product can work in the stakeholder market.

Even if this does not deter the most committed unit trust groups from distributing IPAs to the stakeholder market, the product is unlikely to be attractive as the price constraints (circa 0.33 per cent a year) would exclude most active funds and restrict choice to investment trackers. As these would be freely available in most stakeholder products, then it is difficult to see why anyone would buy one.

What this means is that IPA providers will come to the same decisions as multi-manager providers and distribute their products in areas of the market where the 1 per cent charges cap does not apply.

In many respects, this could mean that IPAs could end up competing with stakeholder pensions in the same way that multi-manager personal pension products will.

Even if IPA providers do work out a distribution strategy that sidesteps the restrictions of a 1 per cent charge cap, they will still need to convince the life companies to play ball. As the current proposals for IPAs will not compel existing pension providers to accommodate IPAs, it is unlikely that anyone will rush to do this given that they are unlikely to gain financially from providing access and are already fully stret-ched trying to implement a new tax regime.

This reticence will arise simply because IPAs must be an integral part of existing pension arrangements and must be valued and administered alongside all other assets.

This means IPAs will be like an additional fund link and providers will need to establish the same sort of infrastructure that is necessary to operate multi-manager products, that is, a system for investing, valuing and disinvest-ing contributions.

Even if some providers do get round to accommodating IPAs, it is a distinct possibility that a charge may be levied for the privilege of investing in an IPA as many already provide access to the same sort of funds through a range of multi-manager funds or a Sipp.

The way in which many players have entered the multi-manager market should give a clue as to how quickly some may open up their pension plans to IPAs. Most have restricted their new multi-manager options to current product generations and have not yet provided access to historic product generations.

If a similar fate awaits IPAs, they could be slow to take off and the unit trust industry may find that they do not ultimately get their hands on the billions lying in insured pension arrangements.

Unless the Treasury gets tough and makes it compulsory for providers to accommodate IPAs across all product generations, then an alternative route might be to sidestep the problems associated with insisting that IPAs are an integral part of a pension arrangement.

If they want to do this, they must surely structure the rules so that IPAs can be established in addition and separate from existing pension arrangements. While this would preclude access to existing pension schemes, it would clear the way for easier distribution alongside the type of pension plans that will be launched next April.

A possible route might be to allow additional Isa contributions subject to a minimum investment period, say, age 60. This would avoid the complexities of pensions and, although it would lead to a tax cost, at least this would be achieved safe in the knowledge that the investments were tied in until retirement age.

When this is lined up alongside the extra flexibility allowing non-earners and occupational scheme members to establish personal or stakeholder pensions, this would provide a tremendous boost to the retirement market, which could be accessed by unit trust companies as well as insurers. We can only hope that the Treasury reconsiders its proposal and finetunes it to deliver a structure that has a better chance of success.

Peter Jordan Head of pension marketing, Skandia Life

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