Will the stakeholder market degenerate into the bloody battle as analyst
Ned Cazalet is predicting?
Stammers: Yes. Even with my rudimentary grasp of mathematics, 10 or more
providers each seeking 20 per cent market share is bound to lead to
disappointment. And cost-controlled mass markets leave little scope for
niche players. Possibly, continuing industry consolidation and the impact
of all the industry reviews currently in progress may defer the battle for
a while but happen it will.
Ritchie: The stakeholder market will be competitive and margins will be
lower – all providers which have chosen to offer stakeholder will have
known that from the start. The keys to success will be pension expertise,
scale, quality web-enabled administration systems and financial strength.
Undoubtedly, in addition to those providers which have already chosen not
to compete in this market, there will be others which will find it
difficult to sustain their challenge in the months and years ahead.
Burgess: We are in for a roller-coaster ride. According to every serious
commentator, there is only room ultimately for seven or eight stakeholder
providers, that is. far less than the 45-plus providers currently
registered with Opra. Providers know this and at the moment the desire to
be a survivor is driving what can only be seen as a price war. The real
question is how quickly will the inevitable consolidation happen and what
kind of market can we expect in the meantime? The next three to four years
will see a shakedown as the market becomes increasingly dominated by
super-large financial organisations marketing multiple brands, and oper-
ating as manufacturers, wholesalers and retailers.
What should the new pensions minister's first priorities be?
Stammers: The annuities' issue should be high on the minister's agenda.
More direction is needed to turn ideas into action. Stakeholder, too, is
never far away. As with any new product launch, the task now is promotion
(especially to employers) and keeping a close eye on take-up.
Finally, if it were me I would be taking an active role in the
polarisation and Sandler reviews – both could have a big impact on the
distribution of private pensions.
Ritchie: His first priority should be to sit back and take no action. We
are only now coming to terms with the new environment post-April 2001 and
we still have to see what the situation will be in October as regards
employer designation. We are moving towards the introduction of the new
state second pension and pension credit, Myners recommendations and MFR
changes are to be brought in and the Inland Revenue is working on plans to
simplify the occupational pension regime. The last thing we need at the
moment is any suggestion of more reforms.
Burgess: His overriding priority should be get more people (and ultimately
all people) who are not yet retired to save sufficient funds to allow them
to live comfortably in retire-ment without being a burden on the state.
This may sound trite and obvious but it is very easy to get caught up in
the confusing detail of our industry and the elements that drive it and
lose sight of this prime goal.
Having established this, there are a number of things that need some
pretty urgent attention. Various reports on preand post-sale customer
information are in danger of colliding and disagreeing.
The issue of post-retirement income needs resolving with some simple
solutions. The pensions credit is in danger of discouraging people earning
less than £20k from saving. More strategically, pension education for
young people would be a good idea.
Will major stakeholder advertising campaigns work?
Stammers: Promotion of stakeholder is essential. Mass advertising
campaigns such as those we saw for the launch of the lottery or (ironically
perhaps) pension misselling are very expensive. Here, the first priority
should be to get the message to SMEs – the employee consultation process
will then do the rest.
The message needs to come from the Government as provider “product push”
is a useful supplement but no substitute.
Ritchie: Advertising campaigns certainly have a role to play in raising
public awareness about pension generally but we know that pensions are sold
not bought and advertising alone is not enough.
From October, many more people will have had the chance to join pension
arrangements offered by their employers and this is another positive step.
Evidence from other pension provision shows that a key factor in
encouraging employee take-up is the offer of employer contributions.
Burgess: I think some pragmatic information aimed at employers in the
run-up to the October deadline will generate some frenetic designation
activity in September. However, I am not convinced that full-scale consumer
advertising is really going to convince people suddenly to start
contributing to pensions. After all, what has really changed to make
contributing more compelling now?
Pensions might have got a bit cheaper, but they are certainly just as
bewildering to the general public and I don't think a cosy image and a
strap line will overcome that barrier. Essentially, people still need
Should the Government act on the Faculty and Institute of Actuaries paper
which includes plans for the Personal Distribution Plan?
Stammers: The FIA paper is an excellent input to the annuity debate,
highlighting as it does the need for a variety of solutions and suggesting
that, just as annuities need to become more flexible, so too do “capital”
approaches such as income drawdown. The PDP as a concept should certainly
be developed further. This, plus recent developments in annuity design
could both sit comfortably within Dr Oonagh McDonald's MRI framework.
Ritchie: Any action the Government takes must continue to embrace the keys
of successful pension planning, in particular, choosing the plan that is
most appropriate for the individual's needs now and in the future.
Advice is a critical part of this process and commitment to long-term
regular savings raises issues such as compulsion and tax incentives.
The key part of this report emphasises how vital it is that individuals
make the right cho- ices in their pension planning and are not constrained
by lack of alternatives.
The major success of product developments in recent years is clear
evidence of a thirst for more tailored retirement solutions for many
individuals. Anything that adds further options in app-ropriate
circumstances is worthy of full understanding and consideration.
Burgess: The FIA's paper represents a timely and scholarly contribution to
the debate about post-retirement income.
I think the evaluation of several methods of achieving income against some
rational criteria is useful and brings some much sought after clarity to
the issues. The concept of the Personal Distribution Plan itself seems
simple and convincing on the face of it but requires a lot of tinkering
under the bonnet and is not particularly cost-effective.
How can IFAs ensure they are giving best advice on contracting out?
Stammers: Predicting the future is never easy. Financially neutral rebate
levels, question marks over the MIG and pensions credit and the future
shape of S2P all combine to make this particular prediction a minefield.
This is an area where the FSA could usefully give the industry guidance
but, in the absence of this, my best advice to IFAs is to share and agree
your assumptions with clients and keep good documentation.
Ritchie: With the introduction of the new rebates from 2002, there appears
to be no clearmathematical incentive to contract out, which actually
strengthens the need for financial advice.
The decision on whether or not to contract out in future is likely,
therefore, to be one of principle rather than mathematics. For example,
does the client believe in taking total responsibility for their own
retirement income? Do they want to continue to place any reliance on the
IFAs will need to discuss clients' circumstances and attitudes with them
and consider all factors, including the risks involved for each case.
Burgess: Essentially, the guidance around contracting out has not changed
since 1988. A comparison against Serps needs to be made using an expected
real rate of return and pivotal ages supplied by providers (as they are
dependent on own charges). However, the pivotal ages depend on
assumptions,and, when advising clients, three competing factors should be
borne in mind:
a higher expectation of growth over earnings would lead to higher pivotal
ages, and vice versa;
Serps' benefit is not affected by investment returns or annuity rate
fluctuations, so contracting in can eliminate some risk;
Serps could be subject to Government action / interference, that is, if
you want control then contract out.
Nigel Stammers, pensions strategy manager,Clerical Medical
Stewart Ritchie, pensions development director, Scottish Equitable
Steve Burgess, head of pensions marketing,Axa Sun Life