How should with-profits be ringfenced within stakeholder?
TM: If with-profits is to be offered in stakeholder, it should have a clear and explicit annual management charge, it should also be segregated from any other with-profits assets and should have thefull value of any investment growth added on a daily basis.
Under the terms of stakeholder, no market value adjuster can be applied so it may, in fact, be simpler just to callit a managed fund, offer lifestyle options and get on with educating consumers about risk management.
DT: The original regulation seemed to suggest that physical separation of stakeholder and non-stakeholder funds was required.
This would have created all kinds of problems and probably would have resulted in a with-profits option not being offered by a number of stakeholder providers.
However, more recently,it has been clarified by theDSS that what is required isan “accounting” ringfence around stakeholder assets invested in a with-profits fund. This is a sensible approach and should not cause problems.
JG: With-profits is, in principle, a fund choice which would sit well with the target market for stakeholder by delivering access to equity growth with an element of smoothing. Further work needs to be done with the DSS in agreeing structures which they would find acceptable for any with profits stakeholder plan.
Will IPAs prove popular?
TM: Probably, in the end, after a stuttering and stumbling start, IPAs will eventually prove to be the most efficient form of defined-contribution investment for pensions.
They suffer from having been dropped into an ext-remely hostile and unsuitable environment at a time when the pension industry is alr-eady working hard to adaptto radical changes to therules of engagement.
They may perhaps be regarded as the runt of this summer's legislation and will have to fight hard for their placein the financial services farmyard. In order to really succ-eed, they do require the DC pension market to become more accommodating to segregated investment.
DT: The key question is not this one but whether stakeholder pensions will be popular and successful. As we know, IPAs are purely an investment and by focusing on them we are in danger of confusing the customer as well as ourselves. If we want to focus on IPAs, the most relevant question is, what do IPAs bring to the pensions table? Our view, and increasingly it seems that of the industry, is – not a lot. IPAs seem to fit the classic emperor's new clothes scenario
JG: Although not a new product, Individual Pension Accounts are very likely to be promoted as such by companies which enter that market.
From a consumer viewpoint, they offer little which cannot be found in other products.
Nevertheless, they may give greater emphasis to investment choices, giving rise to wider fund choice or fund supermarkets, poss-ibly targeted on higher-net-worth clients.
Do life offices and unit trust companies really have an equal chance at winning the IPA market?
TM: Yes, absolutely. Perpetual has already proved it is possible to play away from home by setting up a life company. Equally, the vast maj-ority of life offices already operate a portfolio of unit trust funds and in many cases they have actually amputated their investment management divisions and now present them as independent organisations.
The life offices enjoy an undoubted advantage in their name awareness and range of distribution channels. Sett against this is the fact that in many cases the unit trust companies are much better at the job.
DT: No. Given the lack of any real advantage from investing in IPAs from a consumer perspective, any swing to IPAs will be led by those product providers who want to pursue IPAs in favour of existing product structures.
Given that most investment houses in the pension market have already established life companies to enable them to offer tax-efficient pension funds, it is not obvious that there is going to be a big push.
JG: There is no reason why life offices and unit trust companies – and potentially other providers – should not enter the IPA market successfully, possibly bringing different propositions with different emphases and appeal.
Should the tax-free cash benefit of stakeholder be extended to AVCs and FSAVCs to avoid a switch by occupational pension savers to a concurrent stakeholder?
TM: One of the biggest missed opportunities of the reforms is that we now have far too many defined-contribution regimes. The Government should sweep away some of the dead wood. They should compel all AVC schemes to either re-register as stakeholder schemes or be wound up. They should then introduce full concurrency.
This would all upset lots of people, briefly. Ultimately it would encourage higher levels of member savings, which is where this rollercoaster ride of pension reforms was originally supposed to lead.
DT: Yes, concurrency willcreate an unlevel playingfield between AVCs and FSAVCs and concurrent stakeholder pensions.
It is not just with tax-free cash that AVCs and FSAVCs will be disadvantaged, the emerging benefits from a concurrent stakeholder arrangement will not be subject to any Inland Revenue limits and will not restrict the benefits that can be received from the main scheme.
Investors currently contributing to AVC scheme will need to be advised whether they should move. Other issues such as the level of charges, investment choice, and employer-matching additional voluntary contributions will need to be considered.
Who provides the advice to members of an occupational pension scheme will be an issue as neither the employer nor trustees are likely to be authorised.
If a more level playing field is not created, from April 2001, employers will be forced by law to provide a facility that is likely to be worse value for many members than the concurrent stakeholder alternative.
Only non-controlling directors who earn under £30,000 will be able to switch to a concurrent stakeholder. Those who earn over £30,000 will be at a disadvantage.
JG: Yes. The issue is that part of the benefit under a stakeholder pension at retirement can be taken as a tax-free lump sum, whereas all the benefits under an AVC have to be taken as taxable pension. We therefore believe the Government needs to grant the same tax advantages to AVCs as will exist for stakeholder pensions in relation just to future AVC contributions from those in a defined-benefit scheme earning less than £30,000.
Is the end of the pension plan- ning blight in sight?
TM: It is certainly much easier to plan with confidence now, than it was six months ago.I was surprised at the recent ABI figures showing a mass-ive 25 per cent fall in regular contributions this year.
This would suggest that there is a lot of work to catch up on next year. I believe the pension planning options, including commission terms, are now pretty clear.
DT: Yes and no. We are certainly beginning to see increased activity in the group pension market where advisers seem satisfied to make recommendations. As many of these recommendations favour grouped personal pension solutions, these are being installed now.
In relation to the individual pension market, there seems to be less clarity. Little focus has been given to the individual stakeholder market. Will it have a with-profits option? Will there be external fund links available? Who are going to be the providers of individual stakeholder pension products?
To the extent that many of the answers remain unclear, it is likely that planning on an individual basis will continue to be slow well into next year.
JG: Yes and it is absolutely essential that we land on April 6, 2001 with a clear understanding of both Government and, especially, regulatory intentions so there are no impediments to the provision of advice on, or access to, pensions.
The downturn in indivi-dual pension sales in par-ticular may well be leaving consumers more poorly pos-itioned. It is in everyone's interests that this omissionin pension provision is repaired quickly.
Will the increased responsibilities of small self-administered scheme pensioneer trustees force the market to contract as trustees opt to set up EPPs with potentially lower charges?
TM: I think the recent PSO updates will prompt a re-evaluation of the relative merits of the different options. SSASs will undoubtedly become more expensive to operate, and this will prompt some schemes to view EPP status as more attractive.
I believe there is likely to be a contraction in the number of SSAS providers as some of the fringe players decide the tightened regulations are too demanding to warrant continuing in this market. If this prompts Winterthur to pull out, there will be dancing in the streets.
DT: Yes. Some providers have kept their SSAS charges low by restricting their involvement in their SSASs to the absolute minimum. The new requirements will inevitably increase their costs and disrupt existing administration systems. Many clients will be forced to reconsider their position and may opt to switch to an EPP.
Only those who actively want an SSAS will be prep-ared to pay higher fees. We have insisted on being a party to bank accounts and inv-estments for years so for usit will be pretty much busi-ness as usual.
JG: Both the EPP and SSAS markets will remain steady and deliver their own particular advantages. There is no real advantage to setting up an SSAS before its wider scope is needed and the market is likely to reflect this.
There is consequently no real reason for paying SSAS charges unnecessarily, especially as they are likely to increase to reflect the cost of the greater responsibilities involved for the pensioneer trustee.
Tom McPhail,Pensions developmentmanager, Torquil Clark
David Tildesley,Director (national accounts and corporate pensions), NPI
John Glendinning,Director (pensions development), Scottish Amicable
How should with-profits be ringfenced within stakeholder?