Neither providers nor IFAs are convinced that the raising of the stakeholder pensions charge cap to 1.5 per cent next April will be enough to drum up wider support. IFAs are not expecting a clamour of savers looking to get in while charges are locked at 1 per cent nor an increased demand after April on the back of product providers putting greater resources behind sales pushes.
Pensions minister Malcolm Wicks last week put forward the Government’s amendments to the stakeholder regime, confirming that anyone taking out a stakeholder pension contract before next April will get charges locked at 1 per cent for the duration of the policy. But after that date,product providers will be able to set a charge of up to 1.5 per cent for the first 10 years of the contract, dropping to 1 per cent thereafter.
Richard Jacobs Pension & Trustee Services director Richard Jacobs is not convinced that this will provide much impetus for stakeholder sales in the run-up to April’s charge cap rise.
He says: “The extra 0.5 per cent a year charge makes a big difference to the end pension pot, particularly for younger investors but I am sceptical if there will be a buy now while stocks last approach. The trouble is that are you going to get many IFAs taking it up as a product now when they think they will get more money next year.”
Prudential pensions development director John Glendinning does not believe all product providers will immediately raise their stakeholder charges to 1.5 per cent in April and says it is debatable if consumers are aware of the change.
He says: “It is possible that some people could be persuaded to take out a stakeholder before April and, to that extent, there is a selling opportunity but nobody will be aware of it unless it is brought to their attention and few people are actively promoting stakeholder, except in the workplace.”
But there are more life offices that believe they can exist in the 1.5 per cent world, as highlighted by Prudential’s forthcoming return to the personal pension market.
Can we expect a boost in demand in the higher-charge environment? Wicks expects strong growth in the market with reinvigorated provider and intermediary interest.
He says the charge rise and resultant renewal of interest in selling the product will bring stakeholder coverage of those most in need of retirement provision up from 45 per cent to 62 per cent.
But Jacobs says this figure is plucked out of the air and is not backed by any evidence. Glendinning agrees the numbers look out of kilter with Deloitte and Touche’s projections in its work for the DWP.
He says: “The public do not want to buy pensions and that number will prove to be totally unfounded and is just a joke.”
The Department for Work and Pensions estimates the charge hike will result in stakeholder pension schemes benefiting from an additional 1m in extra revenue within 12 months. After three years, this figure is expected to soar to 11m a year. If increased use of electronic communication and client servicing is factored in, this rises to an additional 13m in extra revenue to stakeholder pension schemes by the third year of the raised charge.
Glendinning does not dispute that a rise in charges will boost scheme revenues but notes it is dependent on employers which have existing schemes raising the charges for new members, which could alienate new savers.
He says: “The extra 0.5 per cent will mean extra revenue but the crunch is that many employer-based schemes will not get that. Where a company has an existing scheme, you may get it in some schemes but not in others.It depends on what the employer, provider and intermediary agree.”
Scottish Life head of pension strategy Steve Bee says raising the charge cap misses the point as it has no impact on the suitability issue, which makes it difficult for IFAs to recommend the product in the workplace.
Putting the potential for employees facing differential charges on their pensions aside, Bee says the group market is the only distribution channel through which providers can realistically offer stakeholder.
Bee says: “I have not heard anyone say that 1.5 per cent is enough to pay for advice. Even if a company has only 20-30 employers, you cannot assume what is good for the whole will be good for each individual. It is a suitability issue, not a price one. If pensions were intrinsically suitable, then they would have been distributed anyway.”
He believes the financially savvy, typically those least in need of retirement provision, will be the only ones to take advantage of stakeholder before the charge cap is raised, with a few setting up schemes for their children and/or grandchildren.
Bee points out: “People interested in taking up stakeholder have done so already.”
If incentives for saving in pensions were introduced, such as ending means’ testing and pound-for-pound matching, then and only then might stakeholder be successful. That is Bee’s solution to the pension problem and many IFAs agree with him.