With stakeholder pensions apparently faltering, there is talk of possible compulsion or changes to the price cap.
A number of providers have recently called for the price cap to move to a 1.5 per cent annual management charge, closer, it is claimed, to the level of charges in other countries. Recent comments suggest the Government is monitoring the price cap but under what conditions would they consider such a change and, crucially, where is the evidence to help them decide?
Outside the financial services industry, price caps are commonly used for utility ind-ustries such as water charges or the price of a local phone call. These prices are typically capped for a set period (usually four-five years), after which there is a review.
This assesses whether the degree of competition is still so muted that a price cap is still required. In the telecoms market, price regulation has been phased out as competition has intensified. Then, if the price cap is still necessary, the review sets it at a level based on, one, the profitability of the regulated companies, two, their relative efficiency, three, their performance in terms of customer service and, four, the amount of investment required before the next review.
Unlike stakeholder, issues surrounding provision to low-income households are considered outside this review.
What is the early evidence on the intensity of competition in the stakeholder market? There are a number of signs that it is working quite well. A good number of providers chose to offer stakeholders, which is generally important if competition is to work.
Some personal stakeholder AMCs have fallen as low as 0.6 per cent, well below the 1 per cent price cap, perhaps indicating that the price cap has not acted as a focal point, which could reduce competition. And stakeholder has pulled down the prices of competing products, such as traditional personal pensions, significantly.
There is little evidence that charging a lower price leads to greater volume of business, one of the key elements of competition. And the impact on other products has been attributable more to regulation (RU64) than to competition. So, for the short term at least, there is not enough persuasive evidence of active competition to allow the cap to be removed altogether. Until the industry provides the Government with evidence that competition is intensifying, product providers should be prepared for price caps to remain.
The alternative is to argue that the cap should be higher to allow producers to expand the market. To argue this convincingly, the industry must produce evidence showing that even the best players in the market cannot compete profitably on the margins available in the 1 per cent world. The current evidence looks weak for those who wish to increase the price cap – surely the many providers in the market cannot all be expecting to make long-term losses?
To find out whether the present position is sustainable, the regulator and the industry must agree the detailed industry economics, particularly their assumptions on the level of service, method of distribution and investment in marketing needed to grow the stakeholder market.
One of Government's key fears must be that if it raised the cap, all stakeholder prices would rise, increasing providers' margins rather than broadening the market that providers can serve. The industry should think about what credible commitment it could make if the Government should consider raising the cap. For example, should it offer an industrywide marketing campaign or price differentials by distribution channel?
Tim Wilsdon is principal at Charles River Associates (TWilsdon@crai.co.uk)