Last month, the FSA announced the basic advice regime to support the Government’s proposed stakeholder products initiative will be implemented from April 2005. What lessons has the Government learned from the stakeholder pension experiment and how far have these informed the development of the Sandler suite of products and the planned advice framework though?
Stakeholder pensions were the Government’s Big Idea for pensions by simplifying the products, allowing low and sporadic contributions and forcing the pension industry to keep costs at 1 per cent or lower.
Pension experts warned the Government that the answer to closing the savings gap did not just lie with product design but a whole range of factors needed to be taken into consideration, including the importance of advice in selling pensions.
This did not stop the Sandler report into the UK savings industry from extending the Government’s key notion that getting the UK to save more involved making the products simpler and cheap enough.
Accepting the proposals, Treasury Financial Secretary Ruth Kelly said the report’s plans should make products easier to understand and help meet the aim of encouraging more people to save in the long term. Many experts feel that the Government has not learnt from the stakeholder pension experience due the fact that the Government has continued to support the idea that there is one key solution to getting people to save their cash throughout the Sandler debate.
Royal London group head of communications Alasdair Buchanan says: “It remains that there is no single, simple magic solution and you cannot solve the current situation just by introducing new products.”
The Government does seem to have paid more attention to industry discontent over the price cap.
It went ahead with the stakeholder 1 per cent cap despite widespread concerns over the potential damage that it might do to the pension industry. For Sandler products, the Government has conceded an additional 0.5 per cent charge.
Fund giant Fidelity wants the Government to scrap price capping while Buchanan would like to see changes to the shape of charges to more accurately reflect the cost of distribution and boost the chances of Sandler products being bought.
He says: “The costs involved with products are higher when they are first set up and lower towards the end. Under price capping, there is a mismatch where you pay less at the start and more at the end when funds grow.”
Buchanan would like to see provision for up-front fees and charges dropping over the years, recalling that there were no queues of people waiting to buy price-capped stakeholder pensions.
There does appear to be an underlying sense among product providers that the Government has still not fully grasped that savings products are larg-ely sold and not bought. Scottish Widows shares similar concerns to Royal London, starting with the point of view there is no single solution to the enormous challenges.
Most firms also feel that face-to-face advice is needed to close the savings gap, being paid for by an up-front charge.
Arguably, one area where it is possible to identify the Government heeding the lessons of stakeholder is the planned basic advice regime. The proposed simpler, quicker and lower-cost form of financial advice to consumers has been designed to support the Government’s objective of making it easier for all consumers to have access to risk-controlled products while still providing an appropriate level of consumer protection.
To a certain extent, this seems to respond to the issue raised by stakeholder pensions that it was not commercially defendable to offer full advice within the price cap and that paying for full advice might not always be appropriate for the original low and middle-earning target audience of stakeholders.
But there remain concerns. As yet, there does not seem to be evidence of stakeholder misselling or misbuying but many advisers and providers fear that where products are bought without full advice, there will be potential for yet another debacle.
Fidelity has argued that Sandler products may well be sitting ducks for misselling and misbuying. Consumer groups appear to agree as they believe there are not enough plain English wealth warnings on equity-linked saving vehicles. A halfway house regime does respond to some of the industry’s concerns but it may prove no substitute for full advice.