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Inside edge: Peter Hales

Notwithstanding the tax breaks consumers are offered to save, they usually opt for what researchers refer to as “immediate gratification”. Even if they do decide to defer “gratification” the savings world remains a daunting place.

Our industry has developed both to persuade and advise but complex and overlapping regulation means it is becoming uneconomic to provide these services to an increasing proportion of the population.

The Sandler REview contains a number of proposals as to how the UK savings market should operate. Central to this is the creation of a range of basic products under the stakeholder label. These products will transfer the protection afforded by the current conduct of business regulation to product regulation around investment choice and annual management and exit charges.

The broad concept is sound and a parallel can perhaps be drawn with the pharmaceutical industry. A box of aspirin can be bought in a newsagents with clear health warnings on the box, a pharmacist can sell a stronger painkiller, having checked out some basic facts, or a GP can prescribe a complex mix of medicines, having made an appropriate diagnosis.

There are, of course, some intrinsic differences between medicines and pensions but nonetheless these should not be seen as a barrier to making this concept a reality.

If the life and pension industry is to be seen as part of the solution to closing the savings gap, we need to engage constructively to ensure an outcome beneficial to consumers and workable for those in product manufacture and distribution. How might this be achieved?

Although simplicity can be introduced into the product design and the need for simplification of surrounding legislation has been recognised, persuasion to act will still be required. Our experience in the stakeholder pension market suggests that achieving a win/win/win scenario for all three participants – the investor getting a good deal, providers obtaining fair return on capital committed and reasonable rewards for those firms involved in distribution – is the key to success. Raising consumer awareness of the need to save will not be a quick win and in the meantime face-to-face sales activity will be required.

It is logical to assume that the target market for these products will invest relatively lower sums than the more affluent. The impact of fixed costs associated with persuasion and transacting the sale is greater for lower premium levels. It will be possible to adopt a less onerous sales process and make further efficiency improvements through-commerce but it is highly questionable if this will enable these products to be distributed successfully within a 1 per cent charge cap.

Although these products would be distributed outside the regulatory framework, it is unlikely that providers would allow their products to be sold without the application of an appropriate set of standards. The risk of brand damage in the event of misselling, or indeed misbuying, is one that the industry must avoid. It would seem sensible to take the approach of adopting appropriate regulation for these products that would be lighter than the current “full advice” model.

This retains the benefits of potential efficiency and cost savings and should assist in boosting consumer confidence. Alongside this, the issue of how these products interrelate with more complicated products and the full advice market needs to be determined.

This idea falls within the scope of the positive change that is undoubtedly needed to make a difference to the level of savings, notwithstanding the already competitive and efficient standing of the UK life and pension industry.

Any change needs to be well thought through and the adage of the devil being in the detail certainly holds true. A fundamental part of the detail is the concept and level of any price intervention, which will need careful consideration as part of any ongoing consultation.

Peter Hales is sales and marketing director at Norwich Union

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