One of the key issues in the stakeholder pensions debate is the degree of regulation appropriate to the products. Would it be prudent to exclude stakeholder pensions from the present framework of regulation by introducing some form of kitemarking?
On the face of it, there are advantages to this. First, providers would not need to include in the pricing of their product the costs of identifying whether or not the product is suitable for the client.
What's more, it should be easier to take out a stakeholder pension if advice is not required, which may encourage more providers to enter the market.
Both these factors could potentially increase the take-up of stakeholder pensions. But they are only part of the story.
Even if a product meets whatever requirements are imposed to comply with kitemarking, this does not inherently make it a suitable pro duct for any particular client.
An individual's circumstances may be such that it is more important that savings are available to address potential short-term needs rather than allocated to long-term savings.
In some instances, selling a stakeholder pension could be the wrong decision.
Regulation does not eliminate the possibility of the product being missold. However, the omission of any requirement to provide advice as to the suitability of a product increases the likelihood of it being sold in the wrong circumstances.
Even if kitemarking is introduced, it is difficult to envisage the situation where an adviser evaluating a client's overall financial circumstances could ignore stakeholder pensions.
Similarly, if an adviser wrongly recommended a stakeholder pension to a client, could that adviser avoid responsibility just because the product was kitemarked?
It is right that kitemark ing should be considered seriously in light of the prosp ect of reduced costs coupled with increased take-up. However, the choice is not just whether to kitemark or regulate. There are at least four possible options.
Although costs may be reduced and take-up increased by introducing kitemarking, it may also result in some people buying stakeholder pensions which are unsuitable for their needs.
It is difficult to quantify to what degree any missell ing could occur. Clearly, if the number of people who could be disadvantaged is relatively small, then it may be a risk worth taking.
Full advice process
This should ensure that stakeholder pensions are sold only in the correct circumstances. Therefore, this has to be the most secure route to avoiding another pensions scandal.
Unfortunately, this option would probably result in higher costs and perhaps a lower take-up.
To enjoy the benefits of kitemarking but reduce the risk of the product being bought by people for whom it is unsuitable, it may be possible to develop a short form of suitability check.
Applicants could be required to complete a short questionnaire of, say, six questions to clarify that the product is suitable.
This may enable advice to be provided at minimal costs. However, even this process adds another cog in the wheel.
If stakeholder pensions can be arranged on a collective basis, then the trustee structure could provide most of the protection needed to make sure that only those for whom the product is suitable are encouraged to take out a stakeholder pension.
On the subject of groups, much has been said about the involvement of trade unions, employers and affinity associations by way of gateways. It is in this area that one can see the greatest potential for IFAs to play an important role in the development of stakeholder pensions.
Equally, I would expect financial advisers automatically to assess the suitability of stakeholder pensions as part of the potential solution to a client's financial planning requirements, irrespective of whether or not the product is fully regulated.
So, a move to kitemarking is unlikely to reduce the need for IFAs to advise on these products.
However, the cost of financial advice may not be fully included in the pricing of these products if kitemarking is introduced.