Like most pension consultants, I do not have much time to write letters in the 1 per cent world, where profit has been cut and only volume can compensate.
Perhaps that is why I have remained one of the silent majority looking on at the policies implemented by successive governments.
This Government's introduction of stakeholder has achieved one predictable goal for which it should be pleased.
It has persuaded thousands of employers (with a little help from us, of course) to opt out of stakeholder designation by introducing an exempt contracted-in money purchase scheme, GPP or stakeholder, with a 3 per cent contribution or more. In this respect, the Government has achieved partial success in pensioning its target group.
On the other hand, stakeholder designation has been the predictable flop – I have heard that one insurer has 35,000 designations with only 500 members in total.
There is currently a debate about GPP costs, which can be higher than stakeholder. When implementing new arrangements, pension consultants will have discussed their remuneration basis with the employer before explaining it to prospective members.
The commission associated with stakeholder is about one-third of what used to be available. Many consultants will tell the employer that if they wish to set up a stakeholder with individual advice to members, then they will have to pay a fee on top of or instead of commission.
On the other hand, it will be explained that if a GPP or Cimp is introduced, then, although a fee can be charged, commission can be taken – generally up to about 55 per cent of what used to be available.
Dealing with GPPs specifically, a monocharge basis can be used but with a charge that is higher than the 1 per cent stakeholder charge – typically 1.25 per cent.
In any event, the pension consultant may wish to recommend with-profits or a wider fund choice to the prospective member and, therefore, it is hardly surprising that most schemes are implemented on a GPP basis rather than stakeholder.
So what does the prospective member get for the extra 0.25 per cent charge?
A review of the existing arrangements.
Advice on whether to contribute.
Where to invest.
To whom any death benefit should be left.
Advice on whether or not to opt out of Serps.
The move to monocharging is another success associated with the introduction of stakeholder legislation. This greatly benefits members in the early years but, oddly enough, not necessarily in the long term. Why would insurance companies agree to it otherwise?
In the old days, £1,000 invested in the first year would have suffered a 5 per cent bid/offer charge, a 1 per cent annual management charge, hopefully 100 per cent allocation and a member's charge of, say, £30.
Total charges could therefore be £90 in the first year – 9 per cent of the premium (although a “loyalty” bonus may reduce the cost in later years). Now it is £10 – or perhaps £12.50 with the cost of advice included.
Why insurers agreed to this I will never know. Perhaps it is based on the bank account passivity principle where they hope members will not move funds away when it becomes profitable to the insurer – likely to be at least 10 years away.
I think this argument is flawed. With a fund worth £100,000 and an annual charge of £1,000, I am sure myself and others (if I do not) could find an equally competitive alternative stakeholder provider that would manage the fund for £500.
So, when recommending an insurer now, the most important factor is financial strength. I do not want my customers to go through the Equitable Life situation again. Charges are now pretty uniform and we all have a similar view of future investment performance.
Having said this, there is no substitute for experience and full-time dedication. To quote an actuarial acquaintance many years ago, when questioned by the Inland Revenue about the assumptions he was using, he replied: “I am the expert and I predict the future – not you.” You may think this is arrogant but you can see his point.
Finally, to the balance of the target audience – the really low earner. Those who have saved will benefit from the minimum income guarantee and the pension credit.
For those who have not saved to date, the introduction of stakeholder pensions will make very little difference to them and any spare cash would probably be better off in the building society.
Pension consultants and IFAs will be very reluctant to advise this target market to take out a stakeholder pension, which may one day be effectively taxed at 40 per cent under the pension credit system.
Without advice, some will take out a stakeholder and the Government will be well advised not to encourage them any more, as this could be tantamount to recommending misbuying. Of course, compulsion could change all this but where does this leave the minimum income guarantee and pension credit system? Compulsion will appear as taxation – not a vote winner.
In conclusion, stakeholder has been as much of a success as could have been predicted at the outset by our industry.
I hope after all this turmoil, pension consultants and insurers will now be able to settle down to a period of calm and reflect on how to make ends meet.
However, Mr Sandler may change all that. Many employees have benefited, for the first time, from pension arrangements implemented and contributed to by their employer and, if they are lucky, they have also received advice at very little cost to them.
The Pensions Partnership, Sandhurst, Berkshire