With a perfect storm of events – a litany of misselling scandals and stockmarket volatility – it is not surprising consumers are reluctant to commit to insurance company pensions for 30 to 35 years.
This is true when the Government expects pension portfolios to grow at about 6 per cent a year before charges over the next few decades. A 2003 Consumers' Association survey found that less than half of those questioned were contributing to a pension and only one in 12 who were not, planned to in the near future.
The main reasons given were fears about stockmarkets, unaffordability and a lack of confidence in the industry.
The Government and industry needs to face up to reality. These tired old arguments about raising price caps so the industry can get out there and persuade consumers to buy pensions are facile and misleading in this climate.
With record levels of debt and property values, pensions will have to be cost-effective to be affordable and provide incentives, minimise risk and have decent standards of regulatory protection to restore confidence. The retail insurance industry cannot deliver value in a properly regulated environment to the mass market (we do not dispute that), but it can be achieved using alternative models. Like it or not, charges need to be kept low. If the price cap goes up to 2 per cent, this means the net return after charges to the consumer would be in the region of 4 per cent a year. It does not take an economic genius to realise that consumers have no incentive to tie their money up in risky pensions when they can get 4.5 per cent from a safe cash-Isa.
Increasing the price cap by 1 per cent means consumers with a 30-year time horizon will have to increase their contributions by 22 per cent a month to provide the same level of pension. Even a 0.5 per cent rise in the price cap needs a contribution increase of 11 per cent. With consumers struggling to repay debts and little cash to spare, raising the costs of pensions will price even more people out of market.
The idea that consumers will be willing to pay more in charges to buy products from a discredited industry is perverse. If large volumes of stakeholder pensions are sold at higher charge levels, then this would lead to widespread misselling, especially when there are alternatives offering a better prospective return at a much lower risk.
The insurers' argument that price increases are needed to sell to consumers on lower-medium incomes is disingenuous. Our analysis shows that insurers would need to, at least, treble charges to make a profit from consumers who can only save £50 to £70 a month and, at least, double charges for those who can save £100 a month.
However, they can make a profit on 1 per cent with contribution rates of £200-plus a month. If charges are raised then firms would maximise profits from higher income groups rather than sell to lower-medium income groups where there are no profits to be made.
Our new focus group and research shows that raising price caps will backfire. The focus groups do not want pensions from commercial firms because they do not trust anyone to do with the industry. They want different types of pensions. But they also blamed the Government for letting down the 'little man' and not regulating the industry effectively.
Raising the price cap would act as a further disincentive to take out a pension. Even at 1.5 per cent, nearly 80 per cent of those surveyed thought that the contribution increases required to offset the extra charges represented a very or quite a big difference – 63 per cent said they would rather have a low-risk saving account paying 4 per cent.
Raising the price cap would anger consumers who already mistrust the industry and Government alike. But the pension gap can be closed if the Government promoted collective pensions schemes with proper corporate governance, and economies of scale to reduce costs and share risk. These schemes can provide consumers with access to pensions at under 1 per cent a year.
There is no justification in raising the price cap to anywhere near the levels deman-ded by insurers.
Will the Government ind-ulge in protectionism of the worst kind by raising the price cap to cross-subsidise an inefficient insurance industry? Or will it put consumers first and keep a low-price cap? The next few weeks will be interesting, to say the least. Mick McAteer is senior policy adviser at the CA