“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's 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
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
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's 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
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
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