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Not everyone wants vanilla

“Forecasting,” a company chairman once remarked, memorably, “is a

difficult business, especially with regard to the future.” I know how he

felt. At regular intervals, our industry is regaled with predictions of

boom, bust and much else besides. The stakeholder story has increased the

decibel lev-els and the air has been thick with the sound of axes –

industrial and political – being ground.

I am supposed to know what is going to happen in various parts of what

have come to be known as the pension markets. I don&#39t know and I don&#39t

think anyone else knows either.

In truth, there is only so much money around and when push comes to shove

it seems unlikely that the existence of any product will change our

aggregate propensity to save. It might change the nature of the vehicle

into which the savings are channelled but switches from personal pensions

to Isas are not actually very significant.

For all the hype, the clues to the future lie with the way consumer

behaviour changes, or not, as the case may be.

Some consumers are going to behave very differently. New technologies lead

us away from distribution economies, where the key to profit is the control

of distribution. They move us towards search economies, where consumers can

get at information on an unprecedented scale and at unprecedented speed.

The consumer takes control because the information asymmetry that the

regulator knows all about is removed.

Maybe. But we can predict with a degree of confidence that the same

consumer will take advice from her IFA on her pension, buy and sell shares

with Charles Schwab and rebroke her risk products annually by phone or

interactive digital television. Or buy a stakeholder on the web, go to an

IFA for investment advice and use a friendly broker in the village for the

risk products.

There is a growing number of people accumulating significant personal

wealth. Many of them have complex lifestyles. Most will have to do

self-assessment returns. The majority have a reasonable propensity to look

for professional advice. Not least, these people are – until they retire or

are made redundant – short of time. Professional advice gives them back

that most precious commodity. These people are smart, and many of them want

control of their affairs. On the pension front, what are they and their

advisers going to be looking at?

Stakeholder might be a decent “starter” product. But ifthey pay maximum

contributions they can build a fund quite quickly. Once the fund is a

decent size, they may be better off taking it out into a cheaper transfer


It is hard to see how the conventional personal pension works for these

folk. If it does not project at least as well as the stakeholder

alternative, then regulatory update 64 or its successor seems likely to

bear on the issue. Self-investment looms large.

Figures are hard to come by but the Sipp market seems to have more or less

trebled in the last five years and is growing very fast. The figures are

problematical. We have no idea how much new money is coming into these

arrangements.We know a lot is transfer money. A fair amount is income

withdrawal, where the lock-in to a single investment house – soon to bea

thing of the past – has played a part. We also know there are plenty of

SSAS to Sipp conversions around.

A Sipp is not even a rich man&#39s toy. Several commentators have pointed out

recently that even quite modest funds canrun under a Sipp at near enough

stakeholder prices.

The drivers of this Sipp growth are getting morepotent by the day. First,

the control motivation is there. Does the better-off client really want a

plain vanilla product that involves the higher contributor in significant

cross-subsidy to lower-level contributors? Does he or she want to take an

interest in who is doing what with their money? Does he or she want the

facility to change the investment strategy at appropriate stages without

the chore of new forms, new policies and all the paraphernalia that goes

with both?

Second, advisers faced with stakeholder or Sipps are likely to examine the

Sipp route carefully. With Sipps, they can get involved in the real

business of investment advice. They can put their name on the Sipp,

strengthening the link with the client at a time when long-term client

retention is the key to success.

Third, discretionary managers want to play. They have clients with funds.

Some of those funds are in pension arrangements. Sipps mean they can manage

that money too. Investment houses think the same way. Their game is about

funds under management. They are interested in how they can increase them.

Conventional insured pension arrangements look vulnerable.

At individual level, the tired old insurance company offerings may be on

the wane. At corporate level, the pressure from the investment houses may

be even greater because the business is not about pensions at all. Pensions

are carrier bags invented by interfering Chancellors of the Exchequer and

their Inland Revenue partners.

What matters is what you put in them – the assets – and how they are

managed to deliver the result.

My only confident prediction is that more and more consumers will work

this out for themselves and that their past performance is a dodgy guide to

the future.


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