With less than a year to go until we meet the proud owner of the very
first stakeholder pension, there is an increasing number of new products
and variations to existing products being introduced.
This means increased choice for the customer and advisers are, quite
rightly, considering the changes and will be looking to ensure that
their customers continue to get best advice.
However, it seems that there is almost an assumption that best advice will
to transfer from existing arrangements either to one of the new
single-charge products now available or to stakeholder once available.
As someone once said: “All generalisations are dangerous, even this one.”
And it is certainly true that to generalise about what is best advice is
extremely dangerous. If financial services fitted comfortably into a one
size fits all approach, there would be no need for advice.
Let us assume an existing pension customer with a product that currently
meets his needs. As the range of products on offer changes, there are two
key questions to be asked when comparing new with old.
Would one of the new products be cheaper?
Would it offer the same (or better) features and
While the answers to these questions will shape the advice to the
customer, the danger is that the second question is overlooked. This is
crucial since no product is really going to save a customer anything in the
long term if it does not meet the customer's needs. False economy is no
Consider a few scenarios. An employer runs a GPP to which he pays a 4 per
cent contribution. He plans to meet the criteria for exemption from the
requirement to provide access to stakeholder.
The current GPP pays full Lautro commission which pays for advice for all
members of the GPP.
The employer recog^_nises the value of advice for all members and wants to
continue to receive it. On the other hand, neither the employer nor the
employees want to pay fees. They prefer to continue to have the service
and advice elements paid for from within
Employees could choose to take out their own arrangements but, if they
did, they would lose out on the emp^_loyer contribution. In these sorts of
circumstances, the likely course of action will be to stay with the
Some individual customers may look at their existing arrangement and
decide that it would be cheaper to move to a single-charge product.
The mathematics inv^_olved may be more complex than at first thought. Are
there likely to be periods where contributions are
not being made?
During these periods, the single charge may prove to be more expensive than
the existing alternative.
But if all the required features can be provided from a cheaper
alternative, then transfer may be right in these cases. The question of
paying for advice would have
to be dealt with separately.
Other individual customers may find that it
is not in their interests
to transfer. For example, where a customer has already made a
significant investment in with-profits, it may not make good fin^_- ancial
sense to crystallise the terminal bonus that has been built up.
The customer may also prefer the with-profits app^_roach under the
existing contract. They might find that the range of funds off^_ered does
not meet their needs or that the life cover or premium waiver they want is
not available. Advice will depend on a number of factors, of which cost
will only be one.
The other issue to con^_sider is the financial impact that these transfers
will have on product providers. It is certainly true that some
will transfer from their current arrangements.
Where a customer transfers to a new-style contract or, in the future, to a
stakeholder, the pattern of the premiums and charges rec^_eived from that
customer will change.
We have all known for some time that the brave new world of the
post-stakeholder environment would put considerable pressure on costs and
Financial strength has always been an important att^_ribute for any major
pension provider. In the future, it will be more and more important in the
pension market to be a committed player with the
this environment, financial strength becomes even more of an asset.
In short, there are two questions for providers which mirror the questions
for customers. Can the provider offer products that meet cus^_tomer needs?
Does the provider have the necessary financial strength? Those who can
answer yes to these questions are best placed to be the major pension
providers of the future.
Nick Bamford, p38-39