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Charging ahead

Few people in the industry will be surprised by the underwhelming level of take-up for the Government&#39s flagship stakeholder pension regime.

If you wanted to be really kind to Messrs Blair, Brown et al, you could say that all the effort so far has gone into establishing the schemes in advance of the October 8 deadline.

In reality, it is more likely that they have totally misunderstood the practical issues of persuading the great British public to part with their hard-earned cash.

Their product, aimed to make pensions freely available to the masses, has ended up as another tax break for the wealthy – large numbers of whom are buying pensions for non-earning spouses, children and grandchildren.

Clearly influenced by the fact that personal pensions created a significant level of misselling, the Government has sought to regulate the product design.

It has also decided to tell people that financial decisions are so simple that they can choose simply by looking at a few pages of decision trees.

Stakeholder is a disaster waiting to happen. No doubt, in a couple of years time we will be reading about millions of investors who have ended up in stakeholder pensions that were not the best option.

One thing everyone can be sure of is that when things start to go wrong, the Government will be all too quick to blame everyone but itself. Many people in the industry are worried that even from the outset it is essential to make sure they have cast-iron justification for any stakeholder advice to protect against possible claims.

Ironically, while the level of maximum charges imposed for stakeholder is causing providers major problems because of the cost of putting the business on the books in the short term, in the long run, stakeholder products may expose policyholders to higher levels of charges than more traditional pension products.

This is the issue that The Exchange is seeking to assist IFAs in addressing with its new online stakeholder service, part of its range of pension tools.

The service will show the financial effect of continuing contributions to any existing plan, making the current plan paid up and transferring future contributions to a new plan and transferring the value of the current plan and any future contributions to a new plan.

A single scroll-down page data entry screen is used to enter all the necessary data on the client – projected retirement, existing arrangements including ongoing, existing and transfer payments and product charges. In a single comparison, details of up to five different products can be compared.

It will generate a report identifying the change in reduction in yield in each of the scenarios examined and also changes to the level of death benefits. This is colour-coded, showing options with more attractive reductions in yield are in green and those with higher costs in red.

It is immediately obvious which routes present the better option in pure cash terms. The service does not, however, take into account softer areas such as any guarantees available, the type of product, or customer attitudes to risk.

The Exchange says this is deliberate as it wants to allow IFAs the flexibility to deal with other issues as they feel appropriate, the role of their service is to provide the analysis in terms of hard numbers.

I think IFAs will want to create their own additional documentation to record how they have captured and evaluated all such issues in arriving at any recommendation.

I would have preferred an option of a wider report to cover the other issues and it certainly would have been useful to capture clients&#39 views on these for record keeping and compliance purposes.

In looking at this service, I am reminded of some of the earlier transfer value analysis systems. These, too, stuck to hard numbers, although, in time, coverage extended to wider record-keeping issues and documenting issues that were client preference rather than hard fact. I would not be surprised to see this service evolve in a similar way.

This is a tool that will have a familiar feel for anyone who has used transfer value analysis systems in the past. The latest version of this service will include a charge database with detailed product charges from a wide range of providers, plus the ability to enter project values as supplied from any product provider to create results.

With negligible levels of commission being paid on stakeholder products, advisers will increasingly need to address advice on these products on a fee basis. The Exchange is charging £10 per case.

This allows the adviser to identify a suitable level of charges for their own time and define a fixed-cost service for potential clients. For an initial period, Exchange users can use the service free for up to five cases within the first month of signing up for this module.

If suitably adapted to cover some of the additional areas highlighted above, services like this could be included in IFAs&#39 own websites or, particularly in the case of stakeholder, in their worksite marketing offerings.

This would be a good way of offering automated services to customers to gain additional revenue without the need for face-to-face advice.

A similar facility addresses issues surrounding contracting out – including the age-related rebates due to change next April and the new second tier pensions. This will allow up to six different charging structures or types of policy to be catered for in one analysis. This is charged at £5 per case.

In the near future further tools will be introduced, inc-luding a pension and savings planner, a pension drawdown comparison service and a full transfer analysis tool.

Ian McKenna is a consultant and director of the Financial Technology Research Centre, which works for a wide range of industry organisations, life offices and technology companies, including Microsoft, Assuresoft and The Exchange. He can be contacted by email at

Tel: 020 7935 2599


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