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The industry can&#39t afford stakeholder

So now we have been treated to another assassination programme by

Panorama, this time on pensions, after the recent cynical offering by the

same programme on the subject of endowment policies.

Looking at the financial mechanics of the proposed plans as directed by

HMG and considering them in the light of whatI feel are a number of

relevant industry statistics, I have been putting a few figures down on

paper to see how there can be any profit in them for anyone in the business

activity of marketing, signing up and managing the administration of them.

The most efficient life companies have in the past believed that 100 per

cent of the first year&#39s premium on an average policy is required to get

the business on the books. That figure covers a massive range of products

and clearly pension business should cost far less. It would be interesting

to know just how much it costs to get personal pension business on the

books and how much of that cost is reflected in remuneration to the


Look then at the typical reduction-in-yield figures for an Isa savings

plan receiving, say, £30 per month. Figures are published showing 3

per cent or more. This is over a 10-year period and includes broker

commission. Strip out the adviser commission and then let a good actuary

calculate the figures for the reduction in yield. The results could be


I fear that the cost of the administration of stakeholder, the setting-up

costs, the investment in IT systems, the marketing costs and then an

inevitable contribution to low-cost fund management (passive presumably)

make it impossible to see how life companies can cover costs, let alone

make a profit. I fear the situation will be that the more they sell, the

more they will lose. Every plan sold will have a monthly collection cost,

a setting-up cost and cost of printing and posting annual statements from

information to be compiled. There will have to be a call centre for the

public – and possibly for those IFAs taking a very long-term or charitable

view – to deal with all the changes that take place and the queries.

Taking as an example a small firm with no current occupational pension

scheme with, say, 40 employees (actually this is above average size),

assume that 75 per cent join (who will persuade them?) and that the average

premium is £30 a month. Total first-year premiums are £10,800,

giving a revenue of £108 for all involved. An annual statement must

cost £1 to prepare and send out (a wild estimate). Assume there is a

25 per cent labour turnover. This will create 16 join and leave

communications for the company. There will be queries, wishes to change

funds used, changes in employment circumstances, stops, starts, increases,

chasing up to do when payments are late.

As it is impossible for the system to work other than on cheque and disk

or electronically using new IT methods, there will also be the investment

in the hardware and software bythe employers and the pension companies.

I would like to see how long it will take to recover those costs and

whether there could possibly be any profit for the providing company, let

alone cover marketing costs.

It is inevitable the whole exercise is one of negative cashflow for a

significant period of time. How long, I would love to know. Has an industry

expert provided a clear estimate of the costs or a business plan based on

expected membership of, say, 500,000? Am I right in assuming that the

companiesconcerned are going to have to dip into their reserves, thereby

prejudicing their financial strength?

Are the few mutuals going to destroy their policyholders&#39 (owners) funds?

Will the proprietary companies destroy shareholder funds by entry into


It is likely that the new investors in the stakeholder plans will be those

who will be financially at the bottom of theearnings scale apart from that

fortunate minority of non-working spouses and offspring of the wealthy who

will finance stakeholder out of the wealthy earners&#39 income, maybe

investment income.

An alternative scenario, however, is much more likely. Those who have

existing personal pension plans may bebetter off in some cases with a

conversion of payments intoa stakeholder. There is a danger that many of

the bigger personal pensions which are profitable to the providers will

convert into unprofitable ones with new setting-up costs.

Either way, it will be an interesting potential selling situation for many

of those marketing stakeholder pensions, especially where the original

salesperson of the personalpension is no longer under commission clawback

risk from the original plan.

A further scenario is the well publicised doomsday scenario of stakeholder

being just the excuse which employers wanted to get out of defined-benefit

schemes, with the implications of an actuarial match of liabilities with

the assets. Gilt yields at the lowest in 30 years do not help. If the

effect of stakeholder is to create this new situation, then the entire

pension industry and most pensioners have a bleak future.

The failure of reference in decision trees to Governmentminimum income

guarantees and the necessity of contributing about £60 a month to

create a fund which will be worth more than the minimum income guarantee,

when added to the Government&#39s clear intention of keeping advisers out

ofthe entire process, indicates a cynical disregard for theadvice,

misselling and suitability of stakeholder pensions for the target market.

I believe they will only work if they combine a realistic minimum regular

monthly payment and compulsion is introduced. Actuaries inform us that

there is now a need to invest about 25 per cent of income into retirement,

to provide maximum benefits under Inland Revenue rules. I understand the

PIA budgeted more than this for funding of their employees

final-salary-based pension fund. Many countries now insist on pension

contributions of 10 per cent ofincome at least.

It was rumoured that when the Government announced its wish list for

stakeholder features, US providers of 401(k) plans advised the Treasury

they would never have got off the ground on the basis of the remuneration

terms available to the providers. It is interesting that there has not been

any indication of a rush from across the Atlantic. Unless, of course, they

are all biding their time to let the mug British companies invest in the

effort and losses suffered by setting up costs, only to rush in, in 10

years time, when the schemes might be achieving critical mass, only to

pirate the business created by British companies at massive cost.

I wish the industry would answer many of these questions. I have spoken

off the record to a few players in the business and dark mutterings are

heard which I am sure the Treasury and Government pensions architect Geoff

Rooker would rather not hear. I think there might be a reluctance to be

seen tocriticise for fear that the media and the politicalspin doctors

will apply their propaganda expertise against the industry.

If I am right, and the rather pessimistic scenarios above have any

substance, then this regime will have been the most ill-conceived, under

researched piece of important legislation perpetrated on the public. About

a year before Labour took power, the party&#39s research department published

a little publicised and ill-thought-out lightweight document about their

wishes for pensions. I suppose the stakeholder regime to be born of that is

no surprise. I just wish I could find it now.

Whatever the faults with pensions in the UK there is more good than bad,

by any international standard. All that needed to be done was to build on ex

isting foundations

Remember, the very first Government measure was to tax pension fund

dividends, costing about £5bn a year or creating the need for about a

10 per cent increase in funding. This problem is aggra-vated by the

necessity of drawdown plans based on equities in the future, caused by the

poor yield and lack of gilt availability. It was the same story of

destruction of Peps and Tessas replaced with less tax-advantageous Isas.

Would it not have been better to have modified the existing regime to

maintain the existingpension options available, which now cover

allconceivable situations?

Introduction of a disconnection between earnings and the right to fund a

pension, albeit restricted to prevent abuse, could have been incorporated.

Add to this high front-end loadings of charges for existing pension plans

and transfer penalties to pay big indemnity commission and a cap on

transfer charges of, say, 5 per cent to be reduced to zero over, say, five


Add a cap on overall charges and we would have had a reasonable regime

which would have continued to offer integrated low cost life insurance,

plus premium waiver.

Continued regulated financial advice would be more likely to avoid another

big potential misselling (misbuying?) scandal. Active fund management and

unrestricted range of funds would continue to have been part of the choice

offered to the pension saver.

As it is, the new regime is a real step backwards and Iwonder whether many

clients now funding a pension are not better advised to invest in an Isa

savings plan. The tax regime for the fund is better. The money is available

if needs be in an emergency and the range of funds likely to be infinitely

better. It will not be taxed in retirement.

No names, no pack drill but a spokesman for a leading pension provider

said to me that the solution was simple, group personal pension plans, no

transfer charge and a large range of funds available and existing, proven

technology in place now.

Of course, the charges would be a little higher but is the 1 per cent

magic macho percentagereally so vital to the Government&#39s ambitions?

If any of the above scenarios are the end-game, it would be a very shallow

victory over an indus-try which, let&#39s face it, Labour will never feel

anaffinity with.

The uncertainty surrounding state second pensions and rebates for

contracting out of Serps, whereby current rebates are lower for

contracted-out money purchase schemes, than for personal pensions used for

contracting out. If that regime continues with group stakeholder pensions

appear-ing to have lower rebates than personal pensions, then GPPs may be a

better choice despite slightly higher charges.

Consider the matter of decision trees and unqualified advice in respect of

the options availableand we have all the makings of a debacle in the

future. Decision trees will have to be free of anydangerous dead wood if

the Government is notto find it falling out of the tree when it gives way,

only to shatter itself when it hits the ground. How many of the unqualified

advisers will be claimingon their professional indemnity cover when clients

may have suffered losses?

Every single Government over 30 years has changed the pension rules. Each

one gets it wrong to a greater or lesser degree, ending up with an outcome

quite different from that intended. Why is it that they all have to

interfere and destroy so as to create their own contribution to political

posterity? They should simply build on what is there. I suppose another

layer of rules and regulations on top of what is there now can only create

more work and fees, or commission, for advisers at the client&#39s retirement.

It comes at a cost though. That provision will not be subsidised by the

profits for the providers and advisers but from existing pensions.


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