The impending arrival of stakeholder pensions has given IFAs some headaches over the past couple of years.
RU64, issued in April 1999, left many IFAs puzzled over the precise meaning of “material disadvantage” if a policyholder elects to switch to a stakeholder pension from a personal pension.
Advisers recommending the current range of personal pensions must explain to their clients the potential effect of the current structures on transfer or premium suspension, whether on a new policy or increments. A level-loaded plan with a 95 per cent allocation rate and 5 per cent bid-offer spread may need a growth rate of over 13 per cent in the first year to overcome the effect of the charges.
Unfortunately, the only way IFAs can avoid any problem with material disadvantage, is to sacrifice much of their own remuneration. Even then a radically diff- erent charging structure necessitates complex and time consuming calculations to show the client there is no loss. The concept of “stakeholder-friendly” is more like “adviser-unfriendly”. The introduction of mono-charged pension products means it is easy to establish complete stakeholder friendliness by setting the annual management charge at 1 per cent.
On charges, there is not much to separate the providers. Depending on the allowance for adviser remuneration, what difference there is can be easily determined due to this charging structure.
The Virgin Direct product has long operated with a 1 per cent annual management charge (0.7 per cent for the fixed interest fund) but this no longer seems remarkable, especially in view of its restricted flexibility in certain areas.
One of the concerns expressed about stakeholder was that the low charges would limit investment choice and this seems to be the case with some of these products.
Virgin Direct offers a choice of a UK All Share tracker fund and a fixed-interest fund. Marks & Spencer also offers two funds but with the balanced equity fund in place of an index tracker.
Liberty offers a choice of four funds, including two index trackers, which could be combined to give something approximating a managed fund. For larger group schemes, Liberty offers the facility to include “guest” funds within the stakeholder charge.
As standard, Scottish Amicable is alone in offering links to external fund managers, although some of these will break the 1 per cent limit.
Nevertheless, the added flexibility and scope for investment planning will be an attractive feature and one we are likely to see more of, provided the range of funds available is sufficiently wide to add genuine value.
The absence of waiver of premium under stakeholder has also drawn a fair amount of criticism. The current range of plans are personal pensions and suffer no such restriction. However, the standard Liberty product does not offer this option, nor does the Virgin plan, although according to the Virgin Direct website, policyholders will be allowed to stop contributions. IFAs will be only too aware of the potential value of this benefit although their clients may not.
Additional life cover will be allowed within stakeholder plans and it is, therefore, a little surprising to note that CGU and Friends Provident have joined Liberty and Virgin in not offering this facility. Potential underwriting problems may hinder the smooth processing necessary under a low margin product, and it may be possible to obtain a better rate for term insurance outside the pension. But some people appreciate the combined package approach for its convenience.
The low margins implicit in stakeholder and the nature of the charges, mean that pension providers have to maintain the business for some considerable time before recouping their costs. This places more emphasis on issues such as financial strength and servicing. Financial strength is difficult to gauge and, as we have seen recently with Equitable Life, can be dramatically affected by apparently unforeseen events.
We would certainly expect to see larger offices, or those, like Clerical Medical or Scottish Amicable, with strong parent companies, win much of the business, particularly if this is coupled with an established reputation for service and a proven commitment to working with IFAs.