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Stakeholder – the four-year itch

Isn’t it funny how quickly things change in our industry? After four years of using uneconomic commission to establish a false market for stake- holder pensions, many product providers have suddenly gone cold on the idea.

Greater shareholder emp- hasis on profits and the approach of the last big demutualisation has led to the biggest U-turn in living memory. Four years on, providers are getting itchy feet, claiming a lack of demand is the main reason for not launching new stakeholder-style products.

The chequebooks which were used to lead us all down the stakeholder garden path are being put away and providers are now talking down stakeholder pensions as if they were the worst-ever idea. Several questions spring to mind.

New products are coming in all shapes and sizes. Loyalty bonus, establishment charges and initial charges are reappearing. Where does it all leave the push for simplicity and the raising standards initiative?

How could so many providers get their sums wrong?

Will providers end up paying a price for their mistakes?

If you compare the April 2001 stakeholder rush with April 2005, was there ever really a demand for the price-cap approach? Although those who did not bother with stakeholder pensions can feel satisfied that this highlights just how good their foresight was, this is of little value.

For those that played, there is likely to be a price to pay. The Department for Work and Pensions has acted quickly to protect existing stakeholder investors from the imp- osition of price increases which could have coincided with a higher-charge cap for new stakeholder business.

This will amount to a 7bn- plus headache for stakeholder providers. The DWP should not think that this is the end of the matter. Some providers with big 1 per cent legacies may consider implementing undeclared strategies which are designed to overcome this.

Although this may be difficult to do, anyone with long experience of our business will know that these types of measures are rarely effective. After all, if providers are not allowed to increase charges, all they have to do is dilute product features to expand margins or encourage transfers into products which deliver greater net margins than stakeholder. Unless retrospective product changes and transfers out of stakeholder pensions are prevented, these stakeholder legacies could diminish. This could mean that, over time, the DWP’s charge restriction will become increasingly irrelevant.

As transferring customers into a new stakeholder product would be too obvious, greater subtlety is likely. Suddenly, stakeholder products are rarely mentioned by providers in a positive light and are being downgraded so they do not compare favourably with other products. Some providers seem to be cutting commission and fund links within stakeholder products to make their new products look more attractive.

Some see Sipps as the solution to all client scenarios. Some of the new Sipp products have been made available to investors who are unlikely ever to invest enough money to make self-investment worth- while. Put cynically, if providers were to develop Sipps with low minimum premiums and a heavy emphasis on investment in unit-linked or mutual funds, could it be viewed as an attempt to attract existing stakeholder money? Such products are unlikely to be suitable for a typical stakeholder client.

Some providers now rarely mention their stakeholder products when post-A-Day opportunities are being discussed, even though most of the opportunities are just as relevant to them. I seem to recall that when stakeholder pensions were launched, these same providers never mentioned personal pensions and all we heard about was mono charges, 1.1 per cent reduction in yields and the new stakeholder pension opportunities.

Given that a huge part of inflows into stakeholder pensions were accounted for by Equitable Life policyholders, the DWP has another reason for keeping a close eye on things.

All in all, stakeholder pensions have been bodged every step of the way and there is no reason to expect that a higher charge cap will make any difference. Some providers are still valiantly plugging away trying to make things happen. The market will split into two areas, with charge cap products servicing the basic advice market and sensibly priced products sold for full advice.

As this four-year itch continues, more providers will change their minds. The impact on providers of this expensive mistake will materialise in many ways. The shape of new products will be heavily influenced by the financial fallout. As the pace picks up towards April 2006, we enter interesting times.

Billy Mackay is pension marketing manager at Skandia


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