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Government should set standards

Polarisation is under attack as never before. The industry as a whole has lost the trust of the consumer. Some of the bigger organisations are hoping and positioning themselves for multi-ties.

The continued use of panels by large nationals and networks weakens the arguments for a truly independent sector. Panels can be compr ised of just two offices. One high-street organisation until recently had a panel of one for its personal pension panel.

The objective of polarisation was consumer protection. Ask a consumer with an end owment, FSAVC, pension transfer/opt-out policy how well protected they have been and you would receive an interesting answer. As industry prac titioners, we know this argument to be shallow and one-sided. But there is a move to a consumer-led populist age nda in all walks of life.

I fear that the argument for polarisation is lost on the current battle lines and that the independent sector needs to find new arguments to avoid the disaster of multi-ties.

To my mind, anything which reduces consumer cho ice and muddies the water between independent and tied advice must be bad news for consumers. The commercial pressures on panel negotiations are already distorting the marketplace and if multi-ties are introduced this will inev itably be compounded.

There is a sense of deja vu around. The arguments over polarisation mirror those around stakeholder when it was first mooted, with the industry wedded to the view that an annual management charge of 1.5 per cent was the minimum acceptable.

From the Government&#39s point of view, the same industry has magically discovered that it can manufacture and distribute products at less than 1 per cent.

A robust independent sector is vital, in fact, it is the only way to ensure best adv ice. An alternative model to the existing framework and the alternatives suggested exists in the form of letting the regulator/Govern ment set minimum standards for all regulated products, ensuring vital industry representation to this process and maintaining the polarisation regime.

I know that most people in the industry feel the Govern ment should not interfere with product design at all. How ever, I feel that introducing minimum standards, which regulate the maximum charge and the style of charges, is the most effective way to restore consumer confidence and maintain an independent sector.

By regulating the products in a certain way, it is possible to ensure the consumer is truly protected by guaranteeing there are no penalties on their product in any event. The levels could be set at an appropriate level and consideration given to allow a loading for the provision of advice.

The implications of this scenario are enormous, not only in terms of product des ign but I would suggest also in terms of remuneration as com mission levels will inev itably fall, speeding up the transition to fees and/or more efficient processes which ens ure business can be distributed off lower margins.

As products become more commoditised and the difference between products red uces the role of IFAs, they will not be so product-orientated but will move to the dreaded phrase of adding value thr ough investment analysis and ongoing advice. Advice will become true advice rather than information, which it is at the moment for many.

Information and comparative tools will become commonplace and easily accessible to the consumer so the information role will no longer suffice as the reason to go to a particular IFA nor will it justify high initial commission.

Consumers can already access comparative tools free off the internet which compare quotes, performance and flexibility and which analyse pensions against other savings vehicles such as Isas.

There is a substantial risk to IFAs that they will provide the advice on the basis of placing the product but the consumer will shop around, using the internet, phone or digital TV to source a more competitively priced product. Advice and ongoing servicing will become the product to sell. The financial product solution will be commoditised and the emergence of self-build products over the next few years will heighten this move.

As the market consolid-ates and tiered AMCs and external fund managers bec ome the norm, IFAs will have to look at their operation and ask why would a customer buy through them.

Add to this the impact of stakeholder on all defined-contribution pensions, which will be profound as charges and commission levels for all pension products reduce by 50-75 per cent.

There is only five months to go before stakeholder pensions and the 1 per cent env ironment and more pundits are being persuaded by the argument that the 1 per cent environment will creep into other product lines too.

The early predictions of a price-regulated market resulting in stakeholder pensions being a vanilla product only limited to tracker funds have been proved wrong as pro viders line up to launch new products, which in many cases are substantially better for consumers than their previous incarnations.

In particular, the introduction of tiered annual management charges to reduce the cross-subsidy of large to small investors is welcome.

The introduction of external fund managers to bolster a provider&#39s investment credentials is a major boost to the retail pension industry.

While the providers have introduced these features to increase the attractiveness of their product and secure market share, it is predominantly driven by their risk planning, to increase their chances of holding on to customers for the long-term.

After all, there are no back-end charges to lock clients in to an underperforming or expensive product.

To my mind, the biggest single impact of stakeholder pensions will be its knock-on effect establishing a minimum benchmark in defined-contribution pensions and providing a framework of a regulated product environment under which competitive forces will continue to thrive.

Stakeholder will fail in its target market. However, it will improve the pension provision of millions of people by lowering charges across the board, resulting in higher retirement funds and a better quality of life in retirement for those who choose to and can afford to start pension planning.

Many millions will not or cannot afford to so the problem will remain until a Gov ernment has the courage either to overhaul the state system radically (unlikely) or introduces compulsion.

Unless this action is taken within the next few years history will view this as the failure of a generation.

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