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Industry faces test of stakeholder strength

Pension providers are facing a huge bill which could run into billions as

a direct result of the Government&#39s stakeholder pension reforms.

Although stakeholder will not be available until next April, the pension

industry is already bracing itself for its dramatic impact, with industry

commentators estimating it could cost some life offices hundreds of

millions of pounds and billions for the industry as a whole.

The impact of stakehol der is already being felt, with the pension market

shift ing itself from complicated “opaque” charging structures towards

simple, single-priced, transparent products which many have labelled


But this Government-inspired shift to low-cost products could have a more

profound impact on the industry than the Government first imagined.

Although impossible to quantify at this stage, it could test the financial

strength of the biggest life offices, which could be forced to dig deeper

into their pockets.

Life offices freely admit that financial strength will now be even more


Those predicted to be worst hit are companies which have been offering

IFAs and their customers high early surrender terms on their pension


Those particularly vulnerable include some of the pension industry&#39s

biggest names and IFA favourites such as Standard Life, Scottish Equitable,

Scottish Mutual and Scottish Amicable.

The peril facing these companies is that much of the business written on

these early transfer terms could now walk out the door into potentially

lower-charging stakeholder or “stakeholder-friendly” plans.

This represents a serious hit to these companies&#39 bottom lines because

most of these plans have been written in the last couple of years which

means most of the costs of setting up the plan and the commission paid to

IFAs has still to be recouped by the provider.

For many providers, the commission paid may be irr-etrievable as the

indemnity period may have passed.

Industry insiders predict it could take providers between five years and

eight years to claw back these costs from the current charging structures.

Scottish Mutual, which was one of the first to offer high early transfer

terms, says it will probably take about five years to recoup the costs.

Bearing in mind that this type of plan first hit the pension market in

1996, it presents many providers with a worrying problem of how to recoup


Standard Life is one of the leading advocates of such plans and could be

one of the worst hit, having written nearly £1bn of high transfer business

since 1996 under its Fair Deal For All range.

In theory, much of this business could be lost although Standard says it

is determined to retain it in the existing scheme or to transfer it to its

new single-priced contracts.

Assistant general manager (marketing) Colin Ledlie says: “We are confident

that we will retain the vast majority of this business and any cost will be

kept to a minimum.”

But he admits the price of retaining the business may be to see it

transferred internally to new plans, thus prolonging the time to make the

pension plan profitable.

Unfortunately for life offices, their nemesis is the very people they have

committed themselves to supporting – the IFA.

Because IFAs are bound under best-advice rules, many may deem it

appropriate to switch their clients&#39 pensions to lower-charging plans.

So, even before the provider has been able to make the plan profitable, it

could have lost it either to a rival or to its own cheaper plan.

Maddison Monetary Management managing director Mark Howard says: “All IFAs

should be looking at stakeholder-friendly plans. It is not a matter of if

but when. IFAs should review their clients&#39 existing plans to ensure they

are not disadvantaged compared with the new batch of plans.”

Wentworth Rose managing director Philip Rose says: “IFAs should be

reviewing their clients&#39 plans, especially for large group personal pension

plans, where they should be considering the charging structure and looking

to improve the structure for future contributions.”

IFAs are also facing tough competition, with rival advisers ready to steal

high-qual ity business if the current adviser fails to review their

clients&#39 plans.

But Informed Choice managing director Nick Bamford strikes a note of caution.

He says that, although IFAs need to review their pension cases, in many

cases it may be the best advice to leave the plan where it is.

He says: “It is doubtful whether transferring will be to many peoples&#39

advantage. But each case must be looked at on its own merit and there could

be serious ramifications.”

Whatever else may come of stakeholder, it is evident that IFA fears that

it would mean less work for them appear to be unfounded.

Whether or not life offices suffer the predicted massive blows from

clients transferring to stakeholder-style plans, IFAs must take charge of

reviewing their pension book or risk losing out to rivals.

This represents a major but worthwhile task, providing IFAs with

opportunity to reacquaint them with their clients.


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