The combination of the 1 per cent price cap and setting up a with-profits fund was not one the majority of providers felt they could offer in a way that would compete with other products that were either stakeholder or with-profits.
The problem with including with-profits within a stakeholder framework is that whatever capital is put into the stakeholder scheme must be ring-fenced under DSS regulations. To provide smoothing and a capital guarantee a fund of capital is required but a stakeholder with-profits scheme cannot borrow money to fund itself as it cannot pay interest under a 1 per cent price cap.
Life offices are saying they cannot see how to meet guarantees with a 1 per cent cap without upsetting the other policyholders. Some have decided if they cannot go into the market with a good product then why do it? Arguing that with-profits is an out-dated vehicle is too opaque.
Scottish Life head of communications Alasdair Buchanan says: “The regulations make it difficult, if not impossible, to have stakeholder at a practical level because of the 1 per cent charge combined with the requirement to ring-fence. We would be happy to offer a with-profits product if that problem wasn't there.”
Legal & General has taken the view that stakeholder and with-profits are impossible bedfellows. L&G pensions strategy director Adrian Boulding says: “Ring-fencing means you can only share experiences with other stakeholder customers – but at the beginning there would be no-one to share with. We took the view that if you created a product like that it would not be with-profits and would be misleading customers to describe it as such.”
Standard Life is offering a with-profits stakeholder product, although it will not share all the characteristics of Standard Life's traditional with-profits fund. It will not have the back-up of the capital that fund has built up over the years.
Standard Life assistant general manager, marketing Colin Ledlie says: “The restrictions of stakeholder meant we couldn't just copy the old with-profits product. So we have had to find the optimum way to offer a with-profits stakeholder product. Previous with-profits products were characterised by guarantees, exposure to equities, smoothing and participation in the profits of the company. We felt that an interest in the profits and smoothing were vital, and exposure to equities was important, but that the guarantee that prices won't go down was less important. With the flexibility of the product and the availability of funds at age 50, the guarantees are no longer relevant.”
Having two separate stakeholder products is not something all providers want to do. Some in the industry are concerned that future comparisons between a traditional with-profits and its sister stakeholder product will leave the newer fund not performing as well.
Buchanan sees several potential problems for anyone combining stakeholder and with-profits. He says: “There is a danger of misrepresentation by the provider. People will need to know they are not getting access to the normal with-profits fund.
“This is a complex thing to explain to a consumer. There is a possibility of mis-selling or mis-buying by people who think they are getting the original with-profits product.”
Standard Life says its stakeholder product will offer similar performance to its original with-profits fund. Ledlie says: “In both cases there is smoothing But capital support is not a great issue. The investment profile will be similar and the returns will be similar.”
But there are some potential differences that Standard Life acknowledges. Ledlie says: “The amount we credit the policy's asset shares each year will be different. The traditional with-profits contracts will receive 0.5 per cent, whereas the stakeholder version will receive between 0.2 per cent and 0.4 per cent initially. But there are benefits to stakeholder with-profits. The ringfencing means the company can't touch the funds to cover other liabilities.”
CIS is closing its traditional with-profits fund to new business for personal and group pensions with the launch of stakeholder. The 350,000 existing with-profits personal pension customers will stay in the main life fund. Any additional payments they make will go into that fund. The traditional with-profits policyholder charges will be reduced to a maximum 1 per across the scheme.
CIS, therefore, will not have the potential problem of having two different with-profits pensions running and being compared concurrently. CIS communications manager Russ Brady agrees with Standard Life that although the guarantees may be less in certain circumstances, stakeholder does offer positive features. Brady says: “You have to remember the advantages of the greater flexibility that stakeholder gives – stopping and starting payments, early access, greater investor flexibility, minimum contributions.”
Norwich Union is running a ring-fenced with-profits product alongside its personal pension. Norwich Union head of individual pensions Ian Buckle says: “Our with-profits stakeholder is different to the Standard Life product. It will have guarantees. The unit price will increase by a guaranteed 5.75 per cent a year. It is more akin to with-profits as we know it.”
If the Norwich Union with-profits stakeholder fund cannot pay on its guarantees for any reason, then money will be put in from either the shareholders capital or the assets of the traditional with-profits fund.
Buckle says: “The stakeholder fund is designed to stand on its own two feet. If at any time it is under threat then we will put some money in from the company's assets.”
Whichever product is successful, it seems there is an appetite in the market for with-profits features for the more risk-averse investor. How the providers set up the business model will decide who makes money out of it. With providers citing 20 per cent of market share as essential for long-term success in stakeholder, making with-profits work will be an important battleground in the pensions war.