Stakeholder pensions look set to be relegated to life offices' basic advice proposition with the bulk of major providers set to launch non-charge cap products early next year.
Norwich Union's decision to cut commission on stakeholder products and launch a price-busting pension in early 2005 has prompted several life offices to show their hands and confirm similar moves in the coming months.
Standard Life, Legal & General and Clerical Medical all say they will follow suit, launching non-charge cap products and focusing their sales and marketing resources on the higher margin, full advice market.
NU and Standard have both publicly recognised that they cannot continue to pay attractive commission levels on stakeholder as margins are too tight. As such, one justification for launching non-charge cap products is that they will help cover the distribution costs of stakeholder products, which they will continue to offer but will market less vociferously.
Scottish Equitable led the way in April with its FPP offering to sit alongside its personal pension and stakeholder options and the rest of the industry now appears to be following suit.
As for where this leaves stakeholder, the Department of Work and Pensions still consider the products a success despite the latest blow to distribution.
DWP spokeswoman Vicky Kennedy says NU and Standard Life's slashing of commission, which disincentivises advisers from selling the product, does not change the Government's stance.
“Stakeholder is a portable, low-cost pension tool, especially for those at the lower end of the salary scale, and it is important that affordable pensions are available. How life offices offer them is not for the Government to dictate.”
NU head of pensions development Iain Oliver says prov-iders had little choice. He says: “Stakeholder was a step in the right direction but the charge cap is not giving us enough room to make the whole thing sustainable for advisers and distributors. It is good for customers but there is not enough margin for providers unless they are prepared to take the pain.”
Hargreaves Lansdown head of pensions research Tom McPhail says advisers have been anticipating further cuts in stakeholder commission but he is less convinced of the future of the product than the DWP. He says: “This calls into question the viability of the stakeholder market.”
The raising of the charge cap to 1.5 per cent next April has been met with a lukewarm response from the industry and, if anything, cemented their position as low-cost, basic advice products. NU and Standard Life still think the margins are too slim but a number of other providers believe that with the two big players, which have around 50 per cent of stakeholder market share between them not active, there will be opportunities for them to build enough scale to make stakeholder work for them.
Prudential, L&G and Friends Provident believe they can operate in a 1.5 per cent universe and Scottish Widows and Axa are waiting in the wings for clarification from the FSA on RU64, which is expected shortly, before launching noncap products.
FSA spokeswoman Ruth Excell says stakeholder is currently under review but the rules are unlikely to be chan-ged significantly by the raising of the price cap.
The main confusion is bec-ause the regulator said in its feedback to discussion paper 19 that it was unconvinced of the need to extend an RU64style approach to the sale of other packaged products in anticipation of the new stakeholder products. On this basis, the FSA has not included any RU64-style measures in its proposed regime.
But, given the fact that the current personal pension suitability standard was born out of the RU64 standard, under which any personal pension recommended must be shown to be at least as suitable as stakeholder, the need for further clarification is understandable.
Excell says: “The jury is still out on RU64 and we have yet to come to a conclusion on RU64.”
Prudential director of pensions development John Glen-dinning says the group is awaiting formal clarification before finalising the format of its new pensions suite in 2005.
He says the fact that this is coming so close to the introduction of the new charge cap regime means many provider launches may be delayed while they digest the regulations.
Whatever happens with RU64, the fact remains that advisers need to extract suitable remuneration from any stakeholder pensions they sell. Oliver says paying for quality advice will form a key part of advisers' justification of selling non-charge cap pensions to clients ahead of considerations such as the wider fund choice typically available outside of the stakeholder wrapper.
He said: “The role of advice is going to be part of the justification. If a client does not want to pay a fee for his advice, then the adviser might have to recommend a product that can finance that cost.”
As such, the sales operations behind stakeholder products need to be slick, with technology used where possible to minimise distribution costs.
Glendinning says this is why Pru only currently sells individual stakeholder through its direct sales channel.
Whatever shape the raft of non-charge cap personal pensions take, Oliver says it is important that the industry takes on board the positives that came out of stakeholder, primarily increased transparency of charges and red-uced front-end fees.
Oliver says: “It is important we do not make the same mistakes which gave rise to stakeholder and we need to ensure we are seen to be acting in the interests of our customers.”