The coming of stakeholder generally, and the 1 per cent annual charge cap in particular, has certainly concentrated pension providers' minds. In the life office camp, there have been a few abstainers but the majority of leading providers have chosen to enter the stakeholder fray.
How do they plan to cope with the 1 per cent annual charge cap? Almost without exception, their answer lies in putting the onus on employees/ scheme members to make their own decisions on whether to join up, how much to pay in, where to invest, when to switch between one fund and another, etc, rather than sit down with a financial adviser.
The charging structure simply is not enough to cover the cost of traditional face-to-face advice. However, the bigger life office providers which distribute their pension products through IFAs have managed to find room in that 1 per cent annual charge cap to pay commission.
Independent advisers may even be able to select from a menu, the choice typically lying between level, fund-based and a blend of initial and reduced fund-based commission.
Although the initial commission levels on offer may be pitched at much smaller percentages of the Lautro scale than in pre-stakeholder days, analogies of magicians pulling rabbits out of hats spring to mind. After all, when the 1 per cent annual charge cap was first mooted, these organisations responded: “Impossible, it can't be done.”
For employees/scheme members, the decision-making will not be made in a vacuum. Product providers and advisers will provide employees with the general background information they need to make decisions based on knowledge rather than ignorance. There will be presentations in the workplace and scheme members will have access to a stream of ongoing information on how their investments are doing, the alternative funds available, the case for moving from equities into fixed interest and cash as retirement draws near (lifestyle switching) and so on through a variety of media. These will include dedicated phone call centres and websites as well as paper-based communications.
This DIY form of investment is effectively a very special variation of the execution-only business that many IFA firms have been transacting for years, for example, with category-C mailshots promoting Isas and with-profits bonds.
Investors make their own decisions without advice. Usually, the IFA firm does some initial research in identifying the market segments that are most likely to respond to the sales message (such as well-off empty nesters) but that is as far as it goes.
But this new – new to the UK, that is – type of decision-making in the workplace is different. Choices will not be based on just a sales brochure with accompanying key features.
Instead, they will be founded on knowledge of both the general (the state benefits system, the differences between defined benefit and defined contribution, the need to make your own retirement provision, the different asset classes, the risks attaching to each, etc) and the specific, for example, the credentials of the fund managers and the investment funds available.
Will such a system really work in practice? We only have to look across the Atlantic for the answer. Member empowerment of the type that is just now appearing in the UK has been an accepted part of life since the late 1980s in the US, where defined-contribution pensions are the main form of retirement provision with assets, according to Vanguard, exceeding those for defined benefit.
The 401(k), which has many similarities with stakeholder and a few key differences, now dominates the DC field. It is no secret either that the UK Government looked closely at 401(k) at the early stakeholder planning stage. I suspect it was not only the product structure that caught the eye. The UK researchers must also have been impressed by the US system of member empowerment at work.
UK life offices may be adopting North American education and empowerment methods in their efforts to make stakeholder work for them but they have to face up to stiff competition.
In the US, the specialist fund management houses are the undisputed leaders of 401(k) and the rest of the DC world. The life offices trail a long way behind. It has not always been this way. In the very early days of 401(k), the life insurance companies, with their established distribution channels, took the biggest slice of the business that was going. But that is now history. It is now the specialist fund managers that reign supreme. Why? The obvious reason is superior investment performance. As in the UK, these specialists, with their dedicated research facilities and fund management teams spread around the major financial markets of the world, tend to consistently produce higher returns over the medium to long term than nonspecialist players.
In the UK, IFAs already predominantly recommend their retail unit trusts, Oeics and Isas to individual clients, just as employee benefit consultants put forward their wholesale funds to the trustees and managers of major defined-benefit occupational pension schemes.
What is so different about stakeholder, GPPs and other forms of definedcontribution pension? It appears that the life offices themselves tacitly accept that there is a strong case for focusing exclusively on investment fund management. Why otherwise are some of them so keen to establish separate asset management brands at several arms' length from their life insurance company parents and associates?
In the US, superiority of investment performance is not the only reason for the specialist fund managers' success in 401(k) and the rest of the DC pension field. Nor will it be on this side of the Atlantic for stakeholder et al. In North America, the fund management houses have made full use of their late-comer advantage to outplay their life office competitors at both the efficiency of administration and effectiveness of communication games.
Free from the burden of having to operate legacy systems to administer blocks of business from the distant past, they, their clients and distributors were able to benefit from the latest state of the art hardware and software from the start.
The fund managers were also quick to adopt modern practices and technology for communicating with scheme members and their employers. Now they are bringing the experience and expertise they have gained to the UK.
On this side of the pond, these investment specialists have one vital extra advantage over their life office competition – a public image that is untarnished by personal pension misselling.
The US experience tells us that member empowerment can work effectively across the board – even for big defined-contribution occupational schemes. In North America, employees of all kinds – from professionals and senior executives to unskilled labourers – take a keen interest in their pension plans.
They realise that their retirement futures are at stake. But it does not stop there. They also have an awareness of investments generally and a fascination with the progress of the markets that would put their UK counterparts to shame. It may not quite be up to FPC standard but this is what member empowerment is all about and the UK Government wants it to happen here.