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Commentary: The return of true price

The collapse of the stakeholder 1 per cent annual charge has once more brought the delicate balancing act between value and price into focus.

It was Einstein who said: “Two things are infinite – the universe and human stupidity and I’m not sure about the universe.” There is no doubt the development of the stakeholder market has produced countless examples of product manufacturers being influenced by, let us say, by a hint of stupidity.

The idea was simple in theory – one size fits all. A low-charge, simple product suite to stimulate demand in low to middle-income earners failing to save for pensions.

Swathes of providers swarmed to offer the products. The FSA threw its hat into the ring. RU64 related to advice given on personal pensions in the run-up to the launch of stakeholder. It required advisers to consider whether a client would benefit from a switch to a stakeholder once that was available. If so, the adviser had to take full account of any penalties under the PP on early surrender. It went on to say the problem would be avoided if clients were recommended PP contracts which, on introducing stakeholder, could be converted without material disadvantage.

The conduct of business rules (Cob 5.3.16) were changed to require an adviser recommending a personal pension to undertake a comparison between the PP and stakeholder. The suitability letter had to explain why they considered the PP to be “at least as suitable” as a stakeholder.

Skandia undertook a detailed commercial assessment and we concluded we would not be able to offer a quality product that was priced for advice at this charge so we declined to take part. Our argument was that by creating as much clear space between the stakeholder model and personal pensions, the “at least as suitable” argument becomes far easier to sustain. If a personal pension contract contained features that were not available in a stakeholder you were on sound ground from an advisory point of view.

As a provider, the maths showed it would be impossible to make money, or even not lose money. This was particularly true when trying to build in commission to pay for advice so how were providers going to fund it? Cross-subsidy from other parts of the business? Lean on with-profits assets? Somebody had to pay.

Many providers decided to adopt the interesting strategy of not only launching a stakeholder but also following this by dressing up their PP contracts to look like a stakeholder. Suddenly it was all about the 1 per cent charge or 1.1 per cent if you were comparing reduction in yield. This gave IFAs a huge headache. How do you deal with the “at least as suitable” argument if everything looks the same? One of the most common questions I have received from IFAs over the last few years was: “Why are your products not priced at 1 per cent?”Put yourself in our shoes, the client gets a 1 per cent product and we get paid properly for the work we agree to undertake.

In the early days, we saw 1 per cent products paying commission at similar levels to commission-loaded products. My answer never changed.The maths did not stack up.Skandia would not introduce product structures that could not be sustained.The true price eventually comes to the market.

When it became clear the Sandler suite would involve a rise in the charge cap, a simple thought came to mind. Most stakeholder terms and conditions stipulate something similar to “The maximum charge that will be applied to your plan will not exceed the maximum amount allowed by the stakeholder pension scheme regulations.”

If the charge cap increased, could providers simply raise the charge and improve margin on the existing stakeholder book? I did not know the answer but it was a question worth asking.

The Government also had concerns. To quote the DWP stakeholder pension scheme regulations issued in November 2004: “The Government strongly believes that people who bought a stakeholder pension before April 6, 2005 (‘existing members’) should continue to pay charges at no more than the cap in place at the time they bought it (1 per cent). As it is unclear, in the light of prelim-inary responses from the industry, that this would be achievable on a voluntary basis, the Government has decided to legislate to protect existing members from higher charges.”

Within days of this, we saw all sorts of changes – changes to the levels of commission payable from both stakeholder and PP plans, reduction of the number of fund links available within stakeholder plans, launch of new products with initial charges to fund commission. And the reason behind all of this? It is no secret that product manufacturers have to be more prudent in how they use capital to secure new business. In simple terms, most providers have less to spend. In these conditions, why would a provider be keen to encourage yet more business into a product that has just been locked into a 1 per cent charge with no prospect of improved margin? There is no doubt that the true price is coming back to the market.

What of the future? Well the good news is that we should at last see a market where there is a clearly defined space between the products suitable to the basic advice and full advice environment. I hope common sense will prevail. The last three years have been a painful period for most involved in pensions.

Billy Mackay is pension marketing manager at Skandia


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