When New Labour announced the launch of the low-charging stakeholder pension, it was greeted with howls of derision and predictions that it could not be done. Now, the worry is that stakeholder could instigate a mass migration from existing pension schemes.
Some providers, such as Virgin, have declared that existing personal pensions will be reborn as stakeholder. Other companies, such as Standard Life, Norwich Union and Friends Provident, will apply a stakeholder-style 1 per cent charging cap to their existing pension book.
Yet there have been warnings from some industry figureheads that switching to stakeholder could result in a significant loss to consumers.
The extent of any migration will only become clear as stakeholder becomes established. But the industry agrees stakeholder does not supply any simple solutions to the pension planning problem.
Axa Sun Life marketing manager Steve Muir says: “There is no universal answer to whether people should stay in existing schemes or transfer to stakeholder.”
Scottish Equitable manager of pensions development Margaret Craig is not convinced there will be a mass migration from group personal pensions to stakeholder plans, nor that it would be desirable. She says: “If there was movement, I would hope it would not be to the detriment of the employee, for instance, if it led to a cut in employer contributions.”
Craig believes there are many schemes where all the parties are happy and questions why they should want to change the status quo. She is also concerned about the impression being given of an easy swap from GPPs to stakeholder. “Changing is not so simple – it is not just a case of flicking a switch,” she says.
It is the cost of any migration that has concentrated the minds of providers. A mass exodus from their existing pension book has led many to reconsider existing business.
Cazalet Financial Consulting principal Ned Cazalet says providers will be repricing their business carefully to ensure they are competitive to combat any poaching.
Cazalet notes that if pre-existing business was planned at a certain charging level, this can lead to a loss of value for the provider. But this might be a bitter pill necessary to swallow to maintain the existing book of business.
He says: “This is a big issue for the life offices. They will present it as in the consumer's best interest but, in fact, it is a big hit on the chin.”
This will have a serious impact on life offices' financial strength, warns Cazalet.
Pretty Technical Partnership partner Kim North also believes the providers will be forced into protecting their market share. She says: “I think the next couple of weeks will see mass mailings from the life offices informing customers of charges brought down to 1 per cent.”
Once the biggest providers have taken the lead, she says others will have to fall into line.
Friends Provident head of pensions strategy Paul Stanbridge says reducing the charges on existing contracts is not merely a ploy to retain existing business. By streamlining and running contracts on a similar platform, he points out that costs can be reduced significantly.
But some believe there is a danger in focusing solely on charges. Craig regrets the emphasis on cost that has accompanied the launch of stakeholder, referring to the old adage of knowing the price of everything and the value of nothing.
Many also point to the restricted funds on offer though stakeholder, which could also affect potential switchers. Existing policies might contain valuable guarantees or other ancillary benefits that could be lost.
Muir and Stanbridge agree the issue is mainly one of advice and suggest consumers should be talking to their IFA.
But who will pay for the advice? Muir says: “Existing customers, who have had advice from their IFA, are entitled to expect that this is ongoing. IFAs will have to be realistic and accept the lower scope for remuneration.”
But lack of advice may stop any mass migration to stake-holder from taking place, according to North. “Unless an IFA is there, people are not aware of stakeholder or the possibilities of switching,” she says.
Torquil Clark pensions development director Tom McPhail is warning that, even if a personal pension's charging structure appears to mimic stakeholder, top-ups could still suffer the same old charges. He predicts top-ups will largely be made into stakeholder in future, whether or not the basic pension migrates.
For existing business, the answer is not so clear cut for McPhail. While those who have paid up-front charges and whose funds might be managed at lower than 1 per cent would lose out by transferring to stakeholder, he believes there are many personal pensionholders who would benefit from the move.
When it comes to new business, there is little doubt that the majority of new pensions will be written as stakeholder. Muir says: “Stakeholder will become the concrete building block of new business.”
North says: “The majority of new business will go via stakeholder, leaving Sipps and so on for the sophisticated few.”