One of the sharpest divisions of opinion among stakeholder pension providers appears to be in the area of with-profits. Some say categorically that with-profits is not feasible in stakeholder. At the other extreme, some not only offer it but have also selected it as their default fund. How can they all be right?
An interesting light is thrown on this subject by a paper being presented to the actuarial profession in February and March. It is entitled, Transparent With-Profits – Freedom With Publicity. A key paragraph of the paper is the following:
“It is not yet known how many companies will offer a with-profits option as part of their stakeholder pension range. The ringfenced nature of the fund means that all guarantee and short-term smoothing costs will need to be financed within the fund unless a company is prepared to support the fund from the inherited estate or from shareholders' funds. Therefore, stakeholder with-profits may be offered only with low guarantees and limited smoothing, thus impairing two of the fundamental attractions of with-profits investment and making the with-profits option less attractive to investors.”
The implications of this paragraph are rather disturbing. If some offices are not only offering with-profits in their stakeholder but also selecting it as their default, they must be expecting that a lot of their stakeholder members will invest in with-profits.
Whichever fund a stakeholder provider selects as the default, the provider is effectively endorsing that fund as being broadly suitable for a wide range of stakeholder members. Yet the actuarial paper is using terms about with-profits under stakeholder which, to say the least, do not inspire such confidence.
It may be that this is all a matter of communication. Perhaps it is reasonable to offer with-profits under stakeholder because it still possesses some good features.
Examples might be participation in the general profits of the life office (but does that also make the stakeholder with-profits liable for unforeseen losses of the office?) or the ringfenced stakeholder with-profits fund may have had a gift of lots of capital from other sources within the life office. But do the donors of such capital know that they have made this gift? If they did know, would they be happy with their own generosity to others?
If the nature of with-profits in stakeholder is fundamentally different from the nature of other forms of with-profits, there is surely a massive obligation on the life office to explain fully and simply what this new form of with-profits actually is.
If they cannot do so when starting with a clean sheet, what hope is there for doing so with existing forms of with-profits which carry decades of historical baggage?
The Consumers' Association is sceptical about with-profits in all its forms but in my view with-profits has served a very valuable purpose by allowing generations of savers to invest in equity markets while giving smoothing of returns and an element of capital guarantee.
It is not at all clear to me – and it would seem the authors of the actuarial paper share this view – that these with-profit advantages extend into stakeholder pensions.
It is very important for the success of stakeholder that it does not acquire a dubious reputation as a result of a muddle over the appropriateness of with-profits. It is easy to be smug and say that group personal pensions do not have the same problem over with-profits as stakeholder. That is true, as they continue to have access to established with-profits funds. But in the public perception, if stakeholder is tarnished, so too will be other forms of private pension.