View more on these topics

Outside edge

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&#39s key fears must be that if it raised the cap, all stakeholder prices would rise, increasing providers&#39 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)

Recommended

Chancellor to simplify VAT with flat rate

Chancellor of the Exchequer Gordon Brown has announced a new flat rate and simplified scheme for payment of VAT. Brown says the changes, which will come in from April, will cut form filling. Brown says: “There is a strong case for cash help for small firms to bring their payroll and tax systems online.”

Business owners

G1. CORPORATION TAXThe Chancellor confirmed his intention to increase the limit of the 10% starting rate of corporation tax from 1 April 2003 from its current limit of £10,000. The limit will be fixed in Budget 2002.Further consultation is proposed on specific ways of simplifying the corporation tax computation for small businesses through aligning profits […]

Threadneedle tempts IFA market

Threadneedle Investments is making its UK corporate bond fund available to the IFA market by adding a retail share class to the existing institutional share class.The fund aims to deliver income and capital growth by investing in investment-grade corporate bonds across a range of sectors. This makes it lower risk than some bond funds that […]

Yet another review

News of another Government review of financial services should come as no surprise.In fact, with reviews of disclosure, polarisation, competition, investment, endowments, advertising, prudential regulation, product regulation, with-profits and the Inland Revenue review on the tax treatment of occupational pensions all under way, it is getting hard to think what it could review next.However, the […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment