Stakeholder pensions are moving quickly from the theoretical to the practical phase. As early as October, pension providers can start registering plans with Opra ahead of the introduction of stakeholder in April 2001.
Given this fact, it is alarming that the final regulations for the Government's init-iative have still not been established. As revealed in Money Marketing last week, the Inland Revenue still appears confused about over exactly how concurrency will work, with different departments sending out different messages over the level of the threshold.
At the Department of Social Security, officials appear to have finally taken on board industry concerns over with-profits and it is conducting a review of how such funds can be included within the proposals. All this means pro- viders cannot begin to design plans if they do not have the whole story.
IFAs cannot advise emp- loyers about what is required of them or employees about what is best for them if they do not have products at their disposal. Consumers cannot be expected to make sense of the pension plan which is supposed to have been simplifying the pension market.
Clerical Medical pensions strategy manager Nigel Stammers says: “Any time something is unclear, the danger exists that you will build the wrong product.”
The DSS, the Treasury and the FSA maintain that all will be sorted in due course. Once the final regulations have been decided, the various bodies say they will launch aggressive ad campaigns to adequately educate the public.
At this point, the average person on the street might have heard of stakeholder but it is unlikely they know much more than that.
Perhaps more importantly, there is still much confusion in the industry. There are a number of issues that have yet to be decided or they are being revisited because of vigorous opposition.
Scottish Life head of communications Alisdair Buchanan says: “The customers, be they either companies or individuals, may know something is happening but are unlikely to know many of the details.”
Given the uncertainty still existing, he says it is unlikely IFAs can provide much practical advice to clients looking for clarification.
He says: “It is impossible for IFAs to give definitive advice at the present time.”
Buchanan says the October deadline set by the Government is at risk because there are so many details yet to be sorted out.
One of the areas of controversy is with-profits policies. Insurers argue that these pol-icies are the most suitable for the stakeholder target audience of low- to middle-income earners as with-profits are designed to provide smooth investment returns, avoiding the fluctuations associated with more direct equity-based investments.
Under existing stakeholder regulations, with-profits are allowed but are practically excluded because it is necessary to set up a new fund rather than continue existing funds. The guarantee in with-profits borrows heavily in cross-subsidy from existing funds.
Stakeholder with-profits funds must be ringfenced, which does not allow this borrowing practice.
In the latest move, the DSS appears to be backing down on this point after meetings with the ABI and the Faculty and Institute of Actuaries.
The Government has agr- eed to review its stance onthis matter but again timeis a factor.
A DSS spokesman says: “There will be no fundamental changes on with-profits. We have laid out the rules and it is up to the industry. The industry has raised some concerns and we are considering these points to see if any changes need to be made.”
But the longer it takes to make up its mind, the less time the industry has to react.
Scottish Mutual technical director Ian Westwater says: “The Government's position is indefensible. I do not think anybody understands the logic behind it.
“With-profits policies are the best way for the target market to invest in stakeholder. It has failed in that respect.”
Even when the matter is settled and the regulations are in place, the industry believes it could be 10 years or more before it sees any profit from stakeholder.
Actuarial calculations carried out for Money Market-ing predict it will be 11 years before the break-even point is reached.
A typical IFA stakeholder product paying commission of 42 per cent of Lautro rates and a further 0.5 per cent renewal commission will not see a profit for 11 years.
Similarly, a plan based on 0.3 per cent commission for IFAs also takes 11 years to break even.
Buchanan says: “You are being optimistic if you think it will be a decade.”
Legal & General pensions marketing director Andy Agar says: “These figures do not surprise me. They show that high levels of commission are not supportable.”
Westwater is more optimistic about the knowledge level within the industry. He says as far as providers are concerned, there is now a greater degree of clarity.
Looking at the IFA sector, Westwater believes most networks and nationals will be adequately prepared to advise on stakeholder because of their member services. But he says many of the smaller IFA players will be left out in the cold.
He says: “Many of them are unlikely to touch stakeholder anyway because of the charging structure. There will not be the commission to sustain an IFA's business and the target market will not be willing to pay fees.”
IFA Pensions & Investment Management principal Phil Moore says that, while heis planning to advise com-panies on stakeholder pensions, he will tell any indivi-duals who walk in the doorto go to a bank unless they are willing to pay a fee.
Moore says: “A lot of IFAs are saying there is no money in it for us, so we are not going to get involved.”
The date for stakeholder to become a reality is fast approaching. The Government has a lot of work ahead of it to clarify a number of issues surrounding stakeholder before it can expect the industry to embrace them and IFAs to start thinking seriously about advising on them.