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's 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' (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' income, maybe
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's 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's 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
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
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's ambitions?
If any of the above scenarios are the end-game, it would be a very shallow
victory over an indus-try which, let's face it, Labour will never feel
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's 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.