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Open season

The Treasury must act soon to open up competition in the pension market

One of the most pressing tasks facing the Treasury and HM Revenue & Customs is to sort out the mess which is bogging down the new pension legislation, most of which is due to come into effect on April 6.

Quite apart from Gordon Brown’s humiliating U-turn on allowing residential property as a qualifying investment in self-invested personal pensions, the publication of detailed regulations is way behind schedule and risks leaving the industry in total confusion well after A-Day.

Only now is the Treasury dealing with one of the most important reforms, expanding the list of institutions eligible to set up pension schemes. The Investment Management Association is pressing the Treasury to allow its members to set up pension schemes under the new rules without waiting for the expanded list of eligible institutions to be approved, which will take until April 6, 2007.

The IMA points out that members which want to set up schemes under the new rules will be at a competitive disadvantage if they have to wait until April 2007 to qualify. The alternative would force them to put in place a business model which would be operational for just one year.

Those most likely to benefit from the expansion of the list of eligible institutions are the fund supermarkets, some of which, like Fidelity, do not have the option of using a parent life company to write pension business – the chosen method for entering the pension market for most unit trust groups.

For the fund aggregators like the supermarkets, wrap providers and other platforms, this route, even where there is a parent life company, has the disadvantage that the product is sold under the name of the life company rather than the supermarket.

“These firms may be in the best position to benefit from the proposed changes, to provide greater flexibility and to create and meet new customer demand,” says the IMA in its response to Treasury proposals for changes to the eligibility rules. “These firms would provide the personal pension policy with open architecture, providing customer access to the investment funds. We would support this development as it is likely to produce the maximum possible choice for investors at the most competitive cost.”

Life companies have had a near monopoly of pension business and the sooner the market is opened up to more innovative and efficient competition, the better.

Life offices abuse their position. The ABI has just launched a new statement of good practice on pension maturities. Head of pensions Helen McCarthy says this is “to ensure that insurers communicate effectively and further improve knowledge and understanding of the annuities market, in particular, the consumer’s right to shop around to get the best deal rather than automatically buying an annuity from their existing pension provider”.

The open-market option has been available since 1978 and it is appalling that life companies are still dragging their feet on informing policyholders of their rights. Even worse, the ABI is trying to blame customers and their advisers for the length of time it so often takes to arrange for the proceeds of a maturing policy to be invested in an annuity.

The ABI says: “Delays have sometimes occurred during this process because customers and their financial advisers have not provided insurance companies with complete or wholly accurate information.” But what about life companies which fail to notify policyholders of the impending maturity of their policy until the last moment, in the hope that the customer will take the annuity rather than shop around?

The sooner the Treasury opens up the pension market to real competition, the better. There is no logical reason why the IMA members should not be given a dispensation to offer pensions from April 6, 2006, rather than being forced to wait until 2007.

Money Marketing50 Poland Street, London W1F 7AX

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