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Throwing down the gauntlet

IFAs are applauding plans by Standard Life to slash pension charges, saying the gauntlet has now been laid down to other providers.

Standard made headlines last month by announcing cuts to charges on individual and group plans by 0.6 per cent to 0.8 per cent from the existing 1.4 per cent annual management charge.

Since the announcement, other life offices have hit out at Standard for encouraging IFAs to sell higher-charging and commission-paying pensions instead of its lower charging stakeholder-friendly plans and ahead of its new low-charging structure due for launch in April 2001.

But IFAs feel Standard has made a good move and the other providers are frightened of this new competition.

Life offices intending to enter the stakeholder market will have to aim for a large slice of the market share. The costs of setting up and marketing the new scheme, together with its low-charging structure, mean it will take a great deal of time for the providers to recoup their losses – let alone break even.

By slashing their charges, IFAs say Standard is making a concerted effort to look after its clients and establish customer loyalty before the April 2001 stakeholder launch. In effect, it is protecting its own back.

Unlike most pensions, Standard&#39s policies do not have exit penalties. It would not cost policyholders anything to transfer their investment into a group stakeholder plan and benefit from its low charges.

Reducing charges will encourage policyholders to stay where they are. It is defending its client base and preventing them going to another provider. Why go through the aggravation of transferring their pension when there will be little additional benefit?

Manor House Financial Advisers managing director Rory Clayton says: “There is a lot of talk at the moment about transfers of money from personal pensions to group pensions but, if the contract is stakeholder compliant, what is the point of moving?”

Providers offering commission-based products will also encourage employers to initiate a stakeholder scheme now rather than waiting until the 11th hour.

Clayton says IFAs will not have to charge employers a fee for the cost of setting up a stakeholder scheme if they will be receiving commission, whereas the narrow stakeholder margins mean many IFAs will be forced to charge clients for their advice. Rival life offices are also claiming the move will cost with-profits members&#39 millions of pounds as Standard attempts to buy the market share – but IFAs are fighting the provider&#39s corner. They accept it will cost money but realise the life office is spending now in an attempt to secure its long-term future.

Without such aggressive action, it could shut itself off from the stakeholder market, which would inevitably cost members&#39 money in the long run. It could also lead to Standard facing a takeover situation and being mutual is something the provider has fought for.

IFA Pretty Technical partner Jo Smith says this strategy is a massive public relations boost for the provider. She says: “It is a very positive thing for it to have done. It is saying we can do this because we are mutual and this is an excellent thing for policyholders. It is good for IFAs as we can show this is a benefit of the provider being mutual.”

However, IFAs also say Standard is not alone in its bid to attain critical mass and establish itself as a major market player in the stakeholder market. Life offices are having to take a long-term view about how they can manage to sustain continual losses for the next 10 years or so. It is likely there will be a considerable number of providers who fall by the wayside.

The worst-case scenario is the market could shrink to only a handful of players, restricting consumer choice and removing part of the justification for using IFAs.

RJ Temple Corporate Division regional managing director David Dresner-Barnes believes there will be a lot more mergers two or three years down the line. Many of the providers offering stakeholder products at the launch date will not survive and IFAs have to be confident the life offices they are recommending will still be around in the future – “it will be a rocky ride for everyone”.

So does this mean IFAs face an environment that is effectively multi-tied? Torquil Clark pension development manager Tom McPhail thinks this is not necessarily so.

He says although the number of pension providers may reduce there could potent-ially be more product choice, especially if IPAs get off the ground.

Potentially, investors will be able to access hundreds of top-name funds and McPhail says IFAs would have a fundamental role in delivering this service to their clients.

The stakeholder market looks set to chop and change over the next few years but one thing that seems likely is, no matter how loudly the life offices may complain now about Standard&#39s strategy, where one provider leads the others tend to follow.

They all need to protect their existing share as well as fighting for a greater one. The battle looks set to become bloody and will leave casualties in its wake.

Michael Philips partner Michael Both says: “The providers are playing Russian roulette. They have five bullets and only one empty chamber and they are all hoping the empty chamber comes up.”

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