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Get ahead with a cap

If the cap doesn&#39t fit you&#39dbetter shrink your head. When the Government

followed the introduction of Catmarked Isas with its announcement that the

charges on stakeholder pensions would be capped at 1 per cent, the

industry&#39s response was typically self-protecting.

We were immediately subjected to one long collective bleat from IFAs and

life offices, which has now lasted for acouple of years. They claimed such

a margin was unworkable and that no one could to get sufficient profit to

justify their involvement. The days ofhugely flabby margins have been

consigned to history and this should be welcomed. The real shame is it took

the Government rather than the industry to stifle the excesses.

The debate rumbles on about how possible it is toprovide advice and

efficientservice levels within thismargin. The simple answer is it can be

done but it requires a more modern view of the world, particularly from


The initial and predictable initiative from the major providers has been

to dig deep into their even deeper pockets and prop up commission rates on

the expectation of 12 to 15-yearpersistency, it is easy to see this

strategy failing as soon as the life office&#39s investment performance dips,

even slightly.

What is required is a sea-change in the way that IFAs view their clients

and the development of their own business. Until advisers take a

longer-term view and condemn the dash for short-term cash, the position

will not improve and we will end up with advised stakeholder pensions as

the next big management disaster for life offices.

In my business, and in almost every other, some preliminary work has to be

undertaken – with a consequent short-term loss – before any revenue is


Why is the IFA market any different and for how much longer can it

continue to rely on being paid up front for work that will largely be

undertaken over a period of several years?

We have already seen companies such as Friends Provident and Legal &

General take an aggressive stance and offer products whose charges are

comfortably within 1 per cent a year. Where does this leave the other

companies who are still claiming that the margin is too tight? If it is

possible to provide Isas within the Cat-limit, there is no reason on Earth

why stakeholder pensions cannot be similarly accommodated. After all, both

products are simply investments within the framework of a tax-efficient


Even after it became clear the Government would not budge on the 1 per

cent cap, we still had to endure the tedious playing of the life office joke

r – that old wild card that can be used to charge whatever is felt

necessary – with-profits.

Cynics might suggest the life industry&#39s continued reliance on this

Victorian invention is as much due to its unavailability to fund management

groups as it is toany strong belief in its characteristics and I am at

leasta little cynical.

Fund management groups have always earned theirprofits by marketing an

investment proposition and ultimately delivering on it. Can with-profits

reasonably be expected to do likewise over the next few years?

Ringfencing will hinder this even further, to the extent that is difficult

to see how the core attractions of guarantees and the smoothing of

investment returns can be accommodated.

So, a 1 per cent cap it is.At least for now. Consider an individual case

and the current average personal pension premium of around £80 a month. On

a £1,000 annual investment, total revenue of about £4,500 over 20 years can

reasonably be expected to pay for all administration and advice where


While this is considerably less than the sum that would fall out of a

traditional personal pension, it seems fairly considerable to me.

Given that the cost of raising a monthly direct debit is almost nil and

efficient systems should result in a similar cost for investing the money,

it seems life offices have little more than persistency to worry about –

and indeed most ofany margin attributed in this direction can be

allocatedto marketing and profit.

For IFAs, there is the genuine threat from online IFAs who will be able to

offer annual advice on this straightforward product for discounted rates of

£100 or less.

This type of facility is already in place for Isas and will certainly

become a feature of the stakeholder market. If more traditional IFAs are

unable to operate within similar margin, they will simply have no place in

the market. The really interesting issue is what impact the introduction of

stakeholder will have on other products.

The real issue of working within the 1 per cent cap is less about the

concern for life offices wanting to derive profit. It is more to do with

the need to finance and offer indemnity commission to IFAs.

If companies are findingthis difficult with a 1 per cent margin, it is not

difficult to see where the squeeze will come when competitive pressures,

particularly from non-IFA companies or further Government intervention,

force that 1 per cent down to 0.75 per cent or even less.

The challenge for product providers is to look ahead, aim even lower and

try to drive competition within the industry rather than leaving consumers

to rely on the Government to look after their interests.


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