With stakeholder launching this week, the issue has forced Legal & General to promise it will dip into its own pockets to meet charges in excess of 1 per cent that are expected to arise if higher-charging external funds outperform lower-charging options.
Royal & Sun Alliance says the issue is one of the key reasons why it is suspending the option of external funds in its stakeholder.
Website Pensionsbusiness.com chief executive Michael Lockyer says the problem arises because many companies have set a fixed charge regardless of the differing costs of external links.
Life offices are left with no room for manoeuvre if policyholders invest in higher-risk and higher-charging funds, and neglect lower-charging funds which average out the charges to below the cap.
L&G is gambling on investors opting for lower-risk and lower-charging funds in the early non-profitable years of their schemes as funds under management grow and the annual management charge drops.
Other big names committed to offering external managers within 1 per cent are Norwich Union, Scottish Amicable and Scottish Mutual but they have put in place measures to protect themselves from busting the cap.
L&G director of retail pensions Randle Williams says: “We decided to give the extra for free as it is clearer for customers to understand.”
R&SA asset accumulation leader Mark Birks says: “We are not clear how the costs of different funds are amalgamated under the 1 per cent cap when different funds cost varying amounts to manage. The customer needs to be clear how they are being charged for these.”
Skandia pension and multifunds manager Peter Jordan says: “If this means that the income provided by stakeholder is not covering costs, break-even point becomes meaningless as providers face making no money at all.”