The introduction of stakeholder pensions is just one driver of change in the UK pension market and it is hard to isolate it from other factors such as demographic changes, employment patterns, the technology revolution, changes in the family unit and other social and economic trends.
In a paper I gave recently at the Institute of Economic Affairs' life insurance conference, I dwelt on changes in consumer awareness and attitudes, as well as the personal accountability of individuals. I suggested that the Government's reforms will not meet their objectives of encouraging private pension provision unless we change public perceptions about pensions.
To stimulate this change, the industry and the Government need to work together to build a culture where individuals understand the need to save and have confidence in simple, flexible and value-for-money pensions.
Moreover, they need access to good advice when it suits them. Changing public perception is as much about education and quality ofcommunication as it is about making a range of new funding vehicles available.
While the industry now knows a lot more about the extent of Government reforms, some of the outstanding issues are ones that will potentially have a major impact on public perception:
The key messages of the Government's communication programme with employers and the public.
The resolution of the concurrency debate and the need to take steps to avoid the fragmentation of pensions as job mobility increases.
The regulation of the sales process and extent to which this will meet consumers' needs and expectations for a simpler product proposition.
Stronger incentives for individuals to save for their longer-term financial needs and how to overcome the disincentive to save created by the minimum income guarantee.
Having said that, let me paint a picture that assumes the Government manages to embed its stakeholder pension reforms fully so thepublic is aware of and has confidence in simple, flexible and value-for-money pensions. What will be the impact on existing methods ofprovision? In this scenario, I strongly believe stakeholder pensions will become the archetypal benchmark for pension products. Other propositions will be judged against them.
The impact of stakeholder is likely to depend on whether the alternatives offers clearer advantages to the consumer or the employer in the areas of product features and service, the quality of customer communications, employeebenefit design and, very important, advice.I should point out this is just one possibleoutcome designed to stimulate thought.
Let us consider personal pensions first. A stakeholder pension is a personal pension that satisfies the minimum standards prescribed by the DSS. All the simplifications in the tax regime for stakeholder pensions apply equally to personal pensions except that personal pensions written before April 2001 can include waiver and flexible life cover.
For stakeholder pensions, unless advice is provided within the 1 per cent charge cap, it has to be a separate contract with income tax and VAT implications.
Private pensions will be a strong growth market as a result of increased public awareness. This has to be good news for personal pensions, especially as I do not expect individuals and their advisers to draw up separate contracts, given the inherent tax implications. However, I would expect some stakeholder providers to offer what the FSA would regard as adequate advice for many circumstances within the 1 per cent charge.
Personal pensions with charges greater than 1 per cent will, therefore, be aimed at individuals who need and value more personal advice or those who seek other features that they value. The good news is that research suggests there are many people who do need and value the personal service associated with quality advice.
Nevertheless, there are two other important factors that should be borne in mind – the powerful influences of the media and regulators. The consumer press and the regulators have started to show considerable bias in favour of stakeholder pensions, labelling personal pensions as expensive, inflexible and complicated.
These trends really began two years before the proposed introduction of stakeholder pensions, with RU64 being the most obvious manifestation so far. Do we really expect these trends to change in the run up to and after April 2001? I will leave you to form your own judgement.
Next week, Jerry Barnfield will look at the impact of stakeholder on group personal pensions and occupational pension schemes.