There has been an active debate about the price cap on stakeholder pensions and Sandler products – should it stay at 1 per cent or should it be increased?
Whatever the outcome, one thing is clear – people are not saving enough to secure their own financial futures. In the short term, this is painful for providers and distributors but the real loser is UK plc and the millions of individuals who will reach retirement without the necessary funds to meet their lifestyle aspirations. To encourage people to save and provide for a comfortable retirement, we need good products which are attractive to buy for the consumer and attractive to sell for the provider. We need companies that are financially strong today and in the future. We need regulation that protects consumers at the appropriate cost. Most of all we need informed and confident customers.
Underpinning all this is the price cap – the level of which will determine the effectiveness of the market. It's easy to say that “the lower the price cap the better” – but is this the case?
Consumers want value for money, peace of mind and security, not cheap or bargain basement. Consumers need to be confident that the company they are saving with will be around when they want to draw their pension in the future – cheap undermines this.
The 1 per cent cap does not make economic sense for companies to manufacture and distribute products. Take the example of a stakeholder pension with a monthly contribution of £100-£1,200 a year. This example would yield just £1 a month (£12 a year) to the provider to cover the costs of product development, manufacture, marketing, distribution and customer service.
Although funds might build up over time to provide increasing levels of contributions to the provider, this is not a sustainable position. With the current level of regulation and consumer understanding it is not possible to operate in this type of environment. The FSA's financial capability initiative on consumer education is constructive and will help in the longer term. However, it cannot address the more immediate issues.
The distribution of products and the right advice process is key to increasing savings. We know consumers need assistance on complex products such as pensions and that they value professional advice. Like everything else in life, this advice has to be paid for. Providers and distributors have to make an economic return – at a price the consumer is happy to pay and provides value.
We have seen from stakeholder pensions that the price cap of 1 per cent is not viable. As a result, some providers have withdrawn from the market or have focused on bigger group schemes to try to make the economic model work.
Others have launched pension products outside of stakeholder with commercial charging structures.
The price cap has prevented almost all forms of mass marketing and distribution – effectively removing the intended target market from the equation. It is time to draw a line under this experiment and learn the lessons.
The UK already has one of the most competitive long-term savings markets in Europe and, prior to price capping, had the best pensions funding provisions in Europe. We now have a situation where eight million people are not saving for their retirement. The Government wants to see a strong public partnership yet private providers are withdrawing as it is not effective to deploy scarce capital in this area.
The private sector needs to be encouraged to deploy resources in partnership with government – the current price cap is not facilitating this.
To work within an economic price cap the industry needs to be more efficient and provide better value for consumers. Much has already been achieved but there is much more to do. This is a painful process and the succession of announcements regarding efficiency measures and job losses in the industry is testament to this.
Companies are finding new ways of operating to reduce costs. We know that costs have a big impact on the real return which customers will earn over the long term.
We will soon hear what the price cap will be. At Norwich Union, we have made our position clear. I hope we see a change that creates a vibrant long-term savings market in which we can take an active and leading role. I believe this will be in the long-term interests of providers, advisers and, most importantly, consumers.
Gary Withers is chief executive of Norwich Union Life