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Stakeholder set to backfire and miss its target

An FSA report published last week under the auspices of the FSA says stakeholder will drive advice and competition out of the market, marginalising the very audience for which it was designed.

It seems that, before the industry can even cry: “We told you so,” stakeholder is likely to backfire against its primary objective of increasing pension cover.

But the FSA was very careful in tucking away a disclaimer within the report, stating that its findings on the impact of stakeholder on competition, distribution and advice were based on the views of the working group&#39s industry members and not the regulators who sat with the group.

The Women and Personal Finance report was put together by the FSA consumer division, the Government&#39s women&#39s unit, the Treasury and financial services representatives. The objective was to look at women&#39s use of financial products and the appropriateness of products to meet their needs.

But in setting the scene of the financial services market, the report looks at industry consolidation, the 1 per cent world and its impact on distribution channels.

Clerical Medical head of strategic marketing David Shelton says: “The fact that the FSA has taken note of what the working party said, even if it says it does not represent its own views, is a good step. By publishing it, the panel must be supporting the analysis of the industry that stakeholder will lead to less competition and disenfranchisement of advice. The Government ought to pay attention to this.”

The report predicts that the drive towards lower margins will mean more mergers and acquisitions, resulting in less choice for consumers. It says: “The market could consolidate to comprise a much smaller number of much larger providers. Increased pressure on new business margins has led to a greater need for internal cost reduction and economies of scale.”

As a result of these pressures on margins, it suggests distribution channels will be forced to shrink. This will lead to IFAs and tied advisers increasingly being squeezed out of the stakeholder market, leaving people without proper advice channels.

The report says: “Many firms will find it difficult to maintain expensive distribution structures, for example, company representatives or independent financial advisers, on the back of the limited returns from the product.”

Richard Jacobs Pension & Trustee Services managing director Richard Jacobs says: “As an IFA, I have to accept what is going to happen to the market. I have had to reposition my business because I cannot afford to see and adv ise the people that stakeholder is aimed at. I will stay small and stay independent.”

Three major direct salesforces have closed this year. Prudential, Britannic and Sun Life Financial of Canada all found they could not afford to keep their sales teams on the road because of the pressures of operating within 1 per cent.

Shelton says: “Prudential, Britannic and Sun Life Financial of Canada were so well placed to sell individual stakeholder. Most of the industry is reaching the same conclusions – the industry is going to consolidate, access to stakeholder will be removed and distribution will be forced out or up market.”

The report suggests the need to achieve higher margins will result in companies cherrypicking high-net-worth customers, again contrary to stakeholder&#39s aim of targeting the mass market.

Prudential, in particular, is ploughing resources into telephone and internet distribution, keeping in-depth face-to-face advice only for highnet-worth clients.

Yet the review found that remote distribution channels were not the most successful way to reach the target audience. The report says: “Ironically, the increased emphasis on remote distribution could work against the less sophisticated and poorer, that is, the original target market for stakeholder pensions. In a wide variety of research studies, this group has been found to attach particular value to face-to-face contact with advisers.”

The review finds women remain underpensioned and, along with less confident investors in general, actually prefer face-to-face advice. Yet many people within the Government and regulators such as the FSA and Opra remain adamant that stakeholder advice can be provided by decision trees. Opra is refusing even to consider including IFA links on its stakeholder website.

Jacobs says: “I should be giving advice to them but I cannot, so they are being excluded from the market. This is at a time when the need for advice is even greater. There are so many tiers of pension legislation – people need IFAs to help. Stakeholder is only one tier on top of an already complicated system.”

However, the DSS insists stakeholder will be easily available to its target audience through company schemes.

DSS spokeswoman Elaine Graham says: “Stakeholder has many advantages, such as low cost and flexibility, making it suitable for low to middle-income earners. It is available to people for whom other sorts of pension provision are not suitable. The Government believes it will encourage people to make pension provision and, as employers will have to offer a stakeholder-type scheme, people will have access to it.”

But while no one in the industry seems to dispute the necessity to bring in better-value products for consumers, it is clear the industry believes stakeholder will backfire.

Legal & General is one notable exception by actively promoting the 1 per cent requirement while IFAs are staying away from the individual stakeholder market. Many insurers believe the only way to make stakeholder sustainable is through compulsion.

Shelton says: “If there was a decent margin for advice, sales and providing the product, companies would get involved enthusiastically. As it is, compulsion is the only answer, which implies it has been defeated. The only way stakeholder will be taken up by the people it is supposed to is through compulsion and that in itself is an admission the policy has failed.”


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