It is fair to say that 1999 will be remembered by most of us for a number
of reasons. Isas arrived, yet more new pension arrangements were on the
drawing board, pricing regulation in the form of Cat-marking came back to
the UK after more than a decade away, product league tables were proposed
and English cricket maintained a steady position in the world game.
In many senses, the world became a more complex place in 1999 when
simplicity is one of the most cherished commodities around. Simplicity is
easy in principle but, in reality, after the rules are defined to cover all
eventualities, it is rarely achieved. The key to simplicity is to reduce
the number of moving parts.
The Isa has not, contrary to all the forecasts of doom and gloom, been a
failure – with one exception. The reality is that equity Isa sales alone
have recovered to the same point as Peps in 1998. Catmarks are here on
nearly one in four products and advisers are selling them.
The only downside to the start of the Isa has been the significant fall
off in the number of regular savings customers. In the case where these are
savings to back a mortgage repayment, this is a very serious issue for
which providers, advisers and regulators will not be thanked in years to
Isas can head for the realm of simplicity but the path will not be without
difficult choices for providers, regulators and the Government. It has to
be true that the more variables there are in the equation, then increased
complexity is inevitable. It is the product design equivalent of the
square-cubed rule. The product has three components in two structures. In
that each of these components is different and each structure needs to
relate to the other, then simplicity will always be challenged.
If the limits are made consistent, then there is a danger of tax leakage
for the Treasury. If life insurance is dropped, then providers of this
component will be robbed of an opportunity to compete in the high-volume,
tax-wrapped, discretionary savings market.
If both these changes are made, we are back to Peps and Tessas, albeit in
one umbrella rather than two. This may be unacceptable to Government due to
a desire to separate new products from those created by previous
The other area where simplicity can be developed is in the relationship
not just within products but between products. Rules are generally needed
when it is necessary to define the relationship between two objects. The
more similar the two objects, the less likely that a rule will be needed to
define the treatment of any differences.
The collective investment industry has only been around, in volume terms,
for a decade. In this time, business has been strong and the focus has been
on growth. In sectors which have been around for a while, legacy becomes
more of an issue as the ratio of new business to existing business evens
out and the size and cost of legacy becomes more significant.
Different investment rules govern Peps and the equity portion of the Isa.
At the moment, as Isas are small and new business is still strong, this may
not feel such an issue. However, when millions of customers have Isas and
millions of customers have Peps and, guess what, these millions are the
same people, then customers will want simplicity.
The simplest solution must be to equalise the rules at little or no cost
or a better long-term solution would be to convert Peps to Isas
unconditionally at the lowest common denominator.
Another area of inter-relationship, which is more relevant now than it
ever has been is that between discretionary savings and retirement savings
products. As individuals take more control of retirement planning, they
will want their underlying products to interact. The save to invest culture
will be strong.
In this regard, the proposals on portable pension investments are
critical, not just from a parochial investment management perspective but
because they cut out unnecessary legal infrastructure and represent a
common component between retirement and discretionary savings. The need to
resolve the taxation harmonisation with PPIs is great.
An area that should merit tighter scrutiny is Catmarks. On Isas, Catmarked
charges are 1 per cent including product, fund management and advice. On
stakeholder, they are 1 per cent for product and fund but with an
additional 0.5 per cent for advice. The latter gives greater chance of
ensuring clients get the products they need and that these remain good
There is no solution to these issues that will not disadvantage someone.
Matthew Fink, president of the US Investment Companies Institute, has said
US individuals will save more if simplicity is achieved. This is in a
country where mutual funds account for more than 30 per cent of savings
compared with 5 per cent in the UK and which has a range of retirement
savings products to which we are merely aspiring at the moment.