Why are so few life offices offering gua-rantees on their with-profits stakeholder?
Birks: Isn't a better question why are so few life offices offering with-profits stakeholder? I can't say for definite.
If R&SA were to offer with-profits stakeholder, I think we would offer the same guarantee (that is, money back on normal retirement (+/- one year) if invested for at least 10 years) as for non-stakeholder products. We would need to clarify how, under the latest guidance, we could “charge” for it.
If this had to be a specific charge from inside the ringfence as opposed to outside,it would influence the profitability. This will be in some firms' minds, particularly if the guarantee is a strong one, namely no MVA at normal retirement (+/- three years) or better.
Clarke: Providing a with-profits fund within the stakeholder regulations and within the 1 per cent charge takes technical expertise and substantial effort, which is one of the reasons that so few providers are offering the choice of a with-profits fund. Guarantees in a with-profits fund come at a cost which is difficult, if not impossible, to meet within the 1 per cent. It can also constrain the investment policy of the fund, which consumers cannot easily understand.
So instead of providing specific guarantees, the trend is to concentrate on the main feature of with-profits that consumers really benefit from, namely smoothing.
Ritchie: I am aware of three stakeholder providers offering something called with-profits under stakeholder, of which one includes an element of capital guarantee.
The other two are, I understand, smoothed managed funds with an element of equity participation in the parent mutual office.
The with-profits problem which is unique to stakeholder is the ringfence. Guarantees need capital and once that capital goes in the ring-fence it can only come out as part of the 1 per cent charge cap.
The problem is ensuring a fair deal for the providers of that capital in these circumstances.
Can external fund links be safely offered under 1 per cent?
Birks: This is a very fraught area for external funds as the additional costs, we believe have to come from the 1 per cent. We are still investigat-ing the possibility of offering some external funds on our stakeholder product.
However, we are struggling to see how we can offer these within the 1 per cent cap. We have estimated that the external fund charges would need to be no more than 30 basis points to fit within the charging structure (this does not allow for any commission to be paid). On top of any annual management charge from the external funds there are additional costs from the funds, which also have to be included within the overall 1 per cent. At this moment in time, we do not see how external funds can safely be offered within 1 per cent.
Clarke: Working within the 1 per cent cap is in itself very challenging and all providers will need to operate a very tight ship if they are to avoid losing money.
Providing external fund links, let alone full professional advice, within the 1 per cent charge merely increases this challenge. However offices meet the expense challenge, it will always be nec- essary to maintain high regulatory standards. I suspect that the attainment of a critical mass of new business will be vital for offices to remain players in any part of the stakeholder market.
Ritchie: The key issue here is to make sure that the charge levied by the external manager on the fund cannot, when taken with the stakeholder provider's other charges, exceed 1 per cent a year of anyone's fund.
It is, therefore, a matter of scheme design. The life office is responsible for ensuring the charges are within the cap and therefore needs to rely on the EFL managers' charges coming in within a set figure. Clearly, this is a significant constraint and it is not surprising that EFLs under stakeholder are less common than under GPP.
Are IFAs selling practices fully compliant on designation-only stakeholder schemes?
Birks: For designation-only business, I believe the IFA is primarily concerned with giving advice to the employer and ensuring that the product is suitable, bearing in mind what the employer wishes to achieve. In many ways, this is a business-to-business decision drawing from a number of sources of information – Opra, life offices and the FSA. The designation process is quite straightforward and I would assume IFAs are documenting exactly how they have taken each employer through it.
Clarke: It is important to break free from the mindset which seems to think that there is another misselling issue around the corner. The extremely tough minimum standards of stakeholder, especially in terms of charges, were designed to reduce significantly, if not eliminate, consumer risk to capital.
It is fortunate those stakeholder schemes which require it are still able to receive some form of advice or guidance – something which many people were saying would be impossible at outset.
Ritchie: This is really a question for IFAs and the regulator rather than a provider. I merely observe that it would be physically impossible for IFAs to spend enough time with employers between now and October 8 to ensure that every employer with at least five employees is compliant with the stakeholder legislation. The hope has to be that after October 8 there will be time and reward for the IFA to rev-isit designation-only employ-ers and really get pension provision going.
This is unlikely to work without significant employer support, including employer contributions.
Is Opra well resourced enough to meet its stakeholder policing responsibilities?
Birks: We are aware that Opra has made an estimate of the staffing requirements for its stakeholder policing responsibilities. However, it is unlikely that they will risk being over-resourced which may mean that, in the short term, they will have a resource shortfall. Opra has proved to be fairly adaptable and if there is such a shortfall, we believe this will be corrected fairly rapidly. There is little point in having a reactive regulator which is unable to react. It seems probable that resources will be made available to ensure it can function effectively.
Clarke: It is certainly important that an orderly and secure regime is in place, otherwise customer confidence will not exist and the encouragement to use stakeholder will be ineffective.
I believe there is an onus on the industry to support Opra in an appropriate manner to help ensure that both the letter and the spirit of legislation is adhered to.
Ritchie: Opra's role is reactive. The key is how many whistles will be blown to them.
There is a major new role for Opra regarding the monitoring of contributions to GPP and stakeholder. Opra will be flooded with reports from providers about employers offering GPP or stakeholder which have not set up schedules and/or are not forwarding contributions on time.
I suspect that Opra's key task in this is to identify the cases where the employees pensions are at risk rather than the ones where the employer is a bit behind with the paperwork.
What is the immediate future of the pension top-up market?
Birks: Turmoil. With no indication of similar treatment for AVCs and their concurrent brethren, how can it be best advice to fund a money-purchase AVC as opposed to a concurrent stakeholder or personal pension for those earning less than £30,000 a year?
Quite apart from the tax-free cash advantage, there is the issue of the charges, which in many cases may be now more transparent if not considerably cheaper than historic AVC schemes.
Allied with that is also the issue of greater fund choice and, at long last, the disappearance of the wretched FSAVC v AVC argument and tales of misselling that arose from an inadequate answering of it. We strongly campaigned for full concurrency, not the income-related fudge we have now, on the basis that it represented an opportunity to start cleansing our industry of the legacy products that merely serve to mystify.
Most occupational schemes do well to get AVC take-up of 15 per cent, many get by with 5 per cent or less.
Clarke: Faced with competition from stakeholder schemes, many AVC fund man- agers have had to reduce their charges to remain competitive. For those earning in excess of £30,000 for whom stakeholder is not an alternative to AVCs, this is a welcome benefit. There is no reason why investment returns from stakeholder schemes will differ from those obtained from AVCs and so the choice of provider will remain important. Of course, it remains mandatory for schemes to continue to offer AVC facilities. However, if employers offer both stakeholder and AVC payroll deduction facilities, it seems likely that stakeholder will prove the more popular choice because of the explicit tax-free cash sum element and the sense of personal ownership.
Ritchie: For occupational scheme members earning more than £30,000, they can do AVC or FSAVC knowing they may get a pleasant surprise from the Inland Revenue regarding tax-free cash. For occupational scheme members earning less than £30,000 where tax free cash is a key differentiator between stakeholder/PP and AVC/FSAVC, the choice is tricky because nobody knows what the Revenue will do.
The sooner this is resolved, the better. Next year we are due to get statutory illustrations of money purchase and this is likely to be a wake-up call for money-purchase people to top up their pension contributions to realistic levels.