I am amazed at the number of people arguing that the national employee savings trust charging structure unveiled last month is expensive.
The resistance to the idea of a 2 per cent initial charge on contributions reflects just how wedded we have all become to the concept of level-charging.
Nest will come in cheaper than most occupational and contract-based schemes for almost all age and service groups. And while you might argue that it should do, bearing in mind the Spartan nature of the offering, let us not forget the target market.
The private sector knows it cannot offer anything to chip shops, hairdressers and nannies for anywhere near the numbers the Personal Accounts Delivery Authority are talking about. Nest may be a lot of things but expensive it is not for the vast majority of its likely members.
More important for our industry, what the Department for Work and Pensions’ announcement of the Nest charging structure has done is kick off the argument over level versus front-end charging.
Advisers, providers and employers can be forgiven for being more than a little aggrieved at the Government’s volte-face on mono-charge price structures.
Having spent a decade trying to make single-AMC products work, the Government decides to go and slap an old-school front-end charge on its product for an indeterminate period. As Friends Provident pointed out, the Government-backed scheme is breaking its own rules, busting the stakeholder cap by a considerable margin.
Friends’ argument that stakeholder regulations should be reviewed immediately has a lot of mileage, particularly given the FSA says it will have an eye to Nest charges when scrutinising arrangements put in place by advisers in the run-up to 2012.
The announcement on Nest charges is significant because it has sounded the starting gun for serious debate about how the rest of the market is going to adapt its dual-charging structures for business after 2012.
Nest has actually done advisers and providers a favour in legitimising front-end charges. But 10 years of hammering home the virtues of level charges, in terms of transparency and fairness towards early leavers, will take a lot of unravelling, and there is a long way to go before the people who actually take out these schemes understand that up-front charges can actually be cheaper.
Providers and advisers promoting consultancy charging come 2012 now have Nest fighting their corner.
A briefing note put out by Pada at the time of the announcement did its best to stick the boot into stakeholder. Even with the 2 per cent initial charge, a 36-year-old saving in Nest will see 6 per cent of fund value disappear through charges, compared with 13 per cent in a maximum stakeholder arrangement. Nest’s figures show it beating both a full stakeholder charge scheme and a large workplace scheme, with a 0.5 per cent charge for all groups save those over 60 saving for a short period.
What would have been interesting, however, would have been for Pada to include outcomes for schemes adopting consultancy charging in its modelling. Up-front deductions from contributions for consultancy charging are going to be considerably higher than 2 per cent, albeit perhaps for a shorter period, but there will be winners and losers and the media will latch on to the losers. Pada will argue that we do not know what these models will look like, so how can it model them. This is something the FSA should be looking at.
The amount of vitriol poured on the Nest charging announcement, even though it is cheaper or on a par with the majority of schemes around, demonstrates the size of the challenge. The industry must undertake the mother of all communication exercises if it is to make dual-charging work.
John Greenwood is editor of Corporate Adviser