A few years ago, unitised with-profits accounted for around half of all money invested into pensions. A standard mix would be 50 per cent managed fund and 50 per cent UWP, with little or no chance of switching in the future.
Now, we all talk of external fund links. This has focused product developers on the internal costs of allowing every investor to access any fund.
You might safely assume that a very small percentage of investors will enter the Mongolian Guacamole fund. However, with an annual charge of 0.6 per cent from those running the fund, a 1 per cent overall charge for administering the policy and paying commission does not leave much room for error.
The pension provider runs the risk of being liable to pick up an unknown tab somewhere down the line.
So where does UWP feat-ure now in the 1 per cent world and why are so few life offices offering it on stakeholder? I cannot say for definite but, if Royal & Sun Alliance were to offer a UWP option, we would give the same guarantee – money back on normal retirement (plus or minus one year) if invested for at least 10 years – as for non-stakeholder products.
We would need to clarify how, under the latest guidance, we could charge for it. If this had to be a specific charge from inside the ringfence, as opposed to outside, it would influence the profitability.
This will be in some providers' minds, particularly if the guarantee is a strong one, for example, no market value adjustment at normal retirement (plus or minus three years) or better. The fact there is no consistency suggests the guidance, as interpreted by individual firms' accountants, is being interpreted in different ways.
But given that we star-ted with a 50/50 approach to fund recommendations, where are we now? We are in a worldwide bear market. The FTSE 100 is around 5,400 compared with a peak of 6,800 a few months ago. The Japanese market has recently hit a 16-year low. We talk as much about deflation as inflation and pension projections at 9 per cent a year look optimistic.
The spotlight is well and truly on the supposed safe UWP option but it is con-stantly being criticised for being opaque and beyond the ken of its intended customers. People think it is supposed to smooth performance but it is still affected by big stockmarket falls through bonus reductions and MVAs.
But, in some cases, in a climate of annual charge myopia, the charges on some providers' UWP options look alluring. Consider the disclosure applying to the UWP quotation. Some offices are issuing quotes to IFAs assuming much lower charge assumptions than for their unit-linked funds.
The difference can be tens of thousands of pounds on the ultimate projections (see Table One).
But what happens if that investor initially invests in the UWP fund and then switches? Is fresh disclosure of higher charges made? Does the UWP investor really have the potential to outperform the equity investor to the tune of £50,000 as shown in Table One?
Then there are the act-ual charges. They are significantly lower than for the same product investing via non-UWP funds.
Will £15,000 less actual deductions translate into a superior end fund value? A recent study suggested it is worth paying more in charges to deliver superior performance as funds charging 1.5 per cent had performed better than cheaper funds. It is possible to buy a car for £100 but would you recommend it?
I vote we keep UWP out of stakeholder as non-Catmarked products can provide those options.
Ironically, the make-up of your average stakeholder investor does not fit the Government's photofit. They seem to be averaging £250 a month and grabbing all the equity options they can and who can blame them? With today's fund prices, these are good times to buy equity funds.