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Open up the alternative markets

“Death knell” and “wake-up call” seem to be key items in the vocabulary of


any article linking stakeholder pensions and IFAs. In financial parlance


this is, of course, a form of hedging.


On the one hand, IFAs could be decimated by the introduction of


stakeholder pensions, or evolving IFAs could survive and thrive.


There is no evidence yet to suggest IFAs are not masters of managing their


destiny ina continuously changing financial landscape. In fact, ABI


statistics show that IFAs continue to maintain their position as the


biggest channel for new life and pension business.


But will stakeholder be different? Let&#39s look at the picture so far.


Downward pressure on pension margins became a reality a year ago when the


PIA issued guidelines in the form of Regulatory Update 64.


These stated that pension products should not be recommended to potential


stakeholder clients, which cannot be converted to stakeholder schemes


without material loss. Estimates are that commission on these pension


products has just about halved.


The transition was absorbed and dealt with by the sector, with no loud


crash of IFAs immediately going to the wall.


As DBS is a public limited company, I can freely talk about the fact that


the turnover of the network business is in fact up 13 per cent for the year


1999/2000 on the previous financial year, in the face of declining pension


income, suggesting that IFAs are as busy as ever.


While there can be no doubt that the advent of stakeholder and the


resulting downward trend on product margins is of concern to the sector,


IFAs have a number of ways of dealing with a new pension environment.


Few believe that the original stakeholder target audience of people


earning £10,000 to £20,000 a year is likely to make provision for


retirement in view of day-to-day demands made on their budget even before


they start thinkingabout the future.


A fee-based route is the only way to secure payment for advice. Again,


whether this target audience will pay for pension advice remains to be


seen.


Others are tackling the group personal pension market, as one of the


provisos leading to employer exemption from having to offer employees


stakeholder is an employer contribution of 3 per cent or more into a GPP.


IFAs are successfully using stakeholder as a means to secure an


appointment with smaller businesses with no pension arrangements for their


employees.


Industry experience shows that if a GPP is established with worthwhile


contributions and the Government has endorsed a contribution rate of 3 per


cent, typically, 50-75 per cent of employees jointhe scheme. This can prove


to be an excellent income stream for IFAs. Each GPP can provide a


ready-made client bank, offering opportunities to investigate the need for


further financial planning.


There is also a school of thought that says, with so much still unknown


about stakeholder, can we be sure that the personal pension is dead and


about to be buried?


Skandia Life group brand manager Peter Jordan demonstrated recently in


Money Marketing that for a wealthier client generally speaking, personal


pensions can compete well with stakeholder pensions. To do this premiums


must exceed £100 a month, the term would need to exceed 15 years and


the personal pension must provide an investment structure that allows IFAs


to provide better overall returns than stakeholder pensions.


On balance, there is no real reason why personal pensions should not be


preferred, apart from policies with low and occasional contributors.


Also in view of recent DSS figures from the British Household Panel, which


show that more than a third of the stakeholder target group have more than


£500 of non-mortgage-related debt, many IFAs see potential in


recommending Isas as a better savings proposition.


Conversely the UK&#39s ageing population profile, the demographic timebomb


that stakeholder is designed to defuse, creates a growing market for IFA


advice in the area of retirement planning.


Central Office statistics show that by 2041 over a third of the population


will be 65 and over. People are more likely to retire earlier than their


parents and enjoy better health. Many people can look forward to having


more time to pursue hobbies and visit their families.


IFAs are actively developing this market, showing how a few hours spent


planningfor retirement will pay off.


Also for those who have made a provision for their retirement, the options


available to secure an income from a maturing pension arrangement have


increased dramatically, increasingly IFAs are guiding people through the


retirement maze.


Doom and gloom about stakeholder pensions is further offset by strong


wealth management opportunities. Financial services giant Merrill Lynch


says in its 1998 UK Private Wealth Report that the market for financial


advice is set to skyrocket as wealth in the UK grows by about 300 per cent


by 2005.


Just a few ways in which IFAs are dealing with forecast declining pension


income are outlined here – charging fees, GPPs, retaining a market for


personal pensions, retirement planning and wealth management. There are


many more, such as affinity group marketing, not covered here, which IFAs


as entrepreneurs will successfully develop.


Nigel Hemingway, Research andtechnical manager, DBS Financial Management

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