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GPPs have become good value

After attacking poor-value personal pensions for years, the Government has

now agreed that the subject of its attack can form a suitable basis for

exempting employers from offering stakeholder pensions. But this apparent

U-turn is, of course, nothing of the sort.

There was a general expectation that group personal pensions, which

reflected the product characteristics which the Government has attacked,

would not be regarded as good enough to offer exemption.

Such schemes were expected to fail the DSS benchmark of a “good” scheme

sincethey would be treated as having an exit charge for the purposes of the

DSS stakeholder regulations. In particular, schemes which offered low early

transfer values through initial units or limited allocation of early

premiums were thought to fail to meet the benchmark.

In terms of the messages which consumers might expect to hear and the messages which providers have become used to hearing, the exclusion of such products was the easy option for the Government.

But it seems to me that the DSS has built into its thinking the fact that

the market has been transformed in the last year or two.

PIA Regulatory Update No 64, in particular, effectively took

low-transfer-value products out of the market and secured, without any

primary legislation, the change to higher-transfer products which the

market had been moving to overseveral years.

So, for new schemes and new entrantsto existing schemes, an adviser would

be very circumspect before continuing to use the types of personal pension

which had been the subject of attack in the past.

The real problem to be addressed by the stakeholder regulation was

genuinely for existing business. It is a well established fact that some

personal pensions with higher initial charges now represent good value for

money in terms of future charges. The set-up costs have been met by the

higher initial charges, reflected in low transfer values now.

But starting now from that low transfer value, plus future premiums, and

rolling forward,the charges might well be very competitive ina 1 per cent


In those circumstances, it would havebeen too blunt an instrument to

prevent aGPP based on such products from exempting an employer from

stakeholder obligations.

The natural consequence is perhaps toconsider whether the exemption could

be conditional on the effective level of future charges being reasonable

compared with the stakeholder standard. But I am glad we did not take that

route which would have opened up new complexities first of all to

administer and then to explain both to employers and consumers.

So I believe the regulations set out by the DSS last month are sensible,

taken in conjunction with RU64, although it may need a degree of

clarification of grey areas.

For example, would future earnings-related increases which were built into

the original contract but which give rise to an increment with low

allocation offend the new definition?

The regulations are, however, only the legislative framework within which

the market will operate. The price of personal pensions has fallen in

recent years, anticipating the stakeholder regime. The need to review

existing GPPs has not gone away.

The eminent good sense for any adviserin looking at the charging

structures and costof an existing scheme against modernmarket offerings

remains just as valid.

Later this year, Scottish Amicable will make comparative packages

available on request to advisers to help with just this comparison.

There is no doubt that legislation and market changes together will still

drive significant change in existing GPPs over the next yearto 18 months.


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