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Weighing the choices

As the introduction of stakeholder pensions edges closer, pension providers have been forced to consider how they can hold on to their existing customers and encourage them to remain in their current pension plans. From April 6, 2001, clients with existing pension plans may be able to transfer to a stakeholder pension plan, either with their existing provider or another company. However, if they choose to transfer, they may have to pay a transfer penalty.
In March 1999, the Financial Services Authority (FSA) issued Regulatory Update 64 (RU64), which provides guidance for the selling of pensions between March 1999 and April 2001. The FSA says that there may be situations where those with an existing pension, particularly low earners, would be better off switching to a stakeholder plan. IFAs are advised to check whether clients would be materially disadvantaged if they subsequently decide to move to a stakeholder pension.
The definition of material disadvantage has been left vague by the FSA because it feels that IFAs and the product providers, who have all the facts about individual clients, are in a better position to determine whether someone will be materially disadvantaged. It says that IFAs and product providers should be aware of the personal and financial circumstances of their clients before recommending pensions. Clients transferring to a stakeholder pension could be materially disadvantaged where their existing pensions have front-end charges in the early years or transfer penalties.
Some companies have stakeholder-friendly pension plans which will be automatically converted to a stakeholder plan on April 6, 2001. But clients who have existing plans that do not convert to stakeholder terms could find themselves disadvantaged if they transfer from a scheme where penalties apply.
Some product providers have adapted their range of existing pension products so that they mirror stakeholder pensions, particularly where the charging structure is concerned. In September 2000, Standard Life was one of the first pension providers to announce a reduction in charges for 850,000 of its existing customers. To qualify for the new single annual management charge of no more than 0.825 per cent, customers must have taken out their pension during the last 12 years. Those that took out their pensions before this time and customers with retirement annuity contracts will not benefit from the changes.
Graham Storrie, assistant general marketing manager at Standard Life, says: &#34I guess it&#39s fundamentally because if you believe the future of pensions is single charge, it would be wrong to do nothing for existing customers.&#34
Other product providers, such as Norwich Union and Legal & General, have fol-lowed suit by abolishing initial charges on existing personal pensions and group personal pensions and introducing an annual management charge that reduces as the fund grows.
Ian Buckle, head of individual pensions at Norwich Union agrees with Storrie. He says: &#34All our existing business, from April 6, 2001, will have lower charges at stakeholder levels. Because some big company names have already done this, we need to protect our business. It&#39s a defensive move to protect the customers we&#39ve already got and to give customers a fair deal. We don&#39t want to give a one per cent charge to new customers and not to existing customers.&#34
IFAs think one of the reasons companies are finding it difficult, or even impossible, to backdate the single charge on all their policies is that some of the older policies may no longer have any premiums being paid in.
From April 6, 2001, existing Norwich Union customers will pay an annual management charge of up to one per cent. But this excludes the additional costs of waiver of premium, life cover and the extra charge incurred if investing into the pension assured fund.
To discover exactly what stance the product providers are planning to take on stakeholder transfers, Money Marketing has conducted a survey among providers offering stakeholder-friendly pensions. The results can be seen in the table on page 14.
The majority of the companies surveyed allow customers to transfer to their own stakeholder pensions from existing products, without penalty. However, Friends Provident is still considering its position and Eagle Star will only allow customers to transfer within the terms of their existing contracts. This means that those who were sold contracts after 1995 can transfer without pen-
alty but customers who took out pensions before that year will have to pay a transfer penalty if the product has an exit charge.
This is similar to Scottish Mutual&#39s approach, whereby policyholders will not have to pay transfer penalties on individual and group personal pensions, free standing additional voluntary contributions or executive personal pensions bought after 1995. However, there may be transfer penalties on pensions bought before that date if the pensions have exit charges. Those with Legal & General pensions will have to pay any outstanding initial unit charges if they hold policies bought before October 1, 1995, but will not pay any transfer charges if their policies were taken out after that date.
Transferring to another provider&#39s stakeholder pension incurs penalties from some companies if there is an exit charge on the particular product. Generally, commission is not paid on such a transfer, but Friends Provident and AIG Life emphasise that this would depend on the arrangements of the companies customers are transferring to. Legal & General takes the same approach as for customers transferring within the same company.
Commission for IFAs is not generally offered on transfers to a stakeholder belonging to the same company. Five companies &#45 AIG Life, Legal & General, Norwich Union, NPI and Scottish Mutual go against the grain. AIG Life says that the commission for transfer to stakeholder depends on the original level of commission. Scottish Mutual provides 60 per cent Lautro commission and Norwich Union offers a choice of full commission at 2.7 per cent or 0.4 per cent fund based commission. IFAs can also sacrifice commission if they choose.
Legal & General allows a choice of commission options that depend on the size of the transfer value. NPI offers fund based commission at 0.3 per cent on individual contracts and negotiable commission on group contracts. Commission sacrifice is also an option.
Many of the companies surveyed have made changes to their existing products as an incentive for their policyholders to remain in those plans. Virgin&#39s group and individual pension schemes will automatically convert to stakeholder pensions from April 6, 2001 for all existing customers. Marks & Spencer converted its personal pension plan and free standing additional voluntary contributions plan to stakeholder-friendly pensions for all existing customers on January 25, 2000. This means that all customers with these plans now pay a single annual management charge of 0.7 per cent and can make a minimum contribution of £10.
Similarly, Abbey National Life has dropped the initial charge on its new and existing flexible pension products, so customers pay only a one
per cent annual management charge, which is built into the fund price. However, an extra 0.85 per cent is payable where customers invest in the Abbey National deposit fund.
Legal & General has cap-ped charges on its personal pen
sion plans, group personal pension plans, FSAVC, company-sponsored AVC and retirement annuity contracts excluding conventional with-profits to
one per cent. NPI is making changes, but the exact nature of these is still under review.
Barclays Life has announced that subject to regulatory approval, it will sell Legal & General branded products, including stakeholder. It will not make any charge on its group retirement account between April 2001 and December 2002. After this period, there will be an annual management charge of one per cent, bringing it in line with stakeholder terms. For Barclays Life customers, it means a saving of £1 for every £100.
Barclays Life, which offers its products only through direct sales, intends to review all products sold between March 1999, when RU64 came into being, and April 2001. It plans to compensate any policyholders who suffer material disadvantage by switching to stakeholder, but does not anticipate having many cases to investigate. It is contacting group clients to talk through their options regarding stakeholder pensions.
Ben Foran, marketing manager at Barclays Life says: &#34We don&#39t expect many cases of material disadvantage, as historically, cases of mis-selling have been very low and we&#39ve tightened it up even more. We have said we will look into every individual case because we want to make sure we do the best for our customers. It&#39s a way of covering our own backs.&#34
Our survey shows that nine companies are not going to review plans sold between March 1999 and April 6, 2001. Of these companies, Scottish Mutual and Winterthur Life believe that because there are no transfer penalties on products sold during this period policyholders will not suffer material disadvantage on switching to stakeholder pensions.
Of the companies who are not going to review plans sold within this period and compensate for material disadvantage, Schroder and Virgin state that there is no need to do so because their plans are stakeholder-friendly pensions that will become stakeholder pensions in April 2001. AIG Life is not going to review its pension plans because it states that pensions sold after the announcement of RU64 were accompanied by a description of RU64 and the implications of choosing that product. The company&#39s view is that it is difficult to see how material disadvantage could have resulted if customers were warned about the implications of RU64. The question is whether all their customers will have read and understood the information they were given before signing their application forms.
Barry Laymond, senior practitioner at IFA firm Barry Laymond Financial Services, says: &#34I think pensions and life assurance products are not bought, but sold and therefore people tend to rely on the advice they are given by the people they have been to see, whether independent or tied.
&#34Although people are given information, I don&#39t believe they read every square inch of it, although I have clients who do. Some do and ask questions, but some don&#39t.&#34
Pension providers are facing a difficult time as there is the potential for existing customers to transfer out of their schemes. It will not be in everybody&#39s interest to switch to stakeholder. For example, benefits such as waiver of contribution options or with profits investment on an existing pension could be lost in the switch to stakeholder.
Steve Muir, marketing director at Axa Sun Life suggests that some products could produce a better result for the customer if they simply stop paying money into them and then start a stakeholder plan rather than transferring the fund across. &#34The charges may reduce if someone stops paying but if they transfer to a stakeholder plan, they might have to pay a transfer penalty. Even where there are no surrender penalties, there are benefits to having a policy that they can go back to in the future.&#34
Bob Vaughn, senior partner at IFA firm Ashley Vaughn Partnership says: &#34If companies such as Standard Life slash charges to bring them into line with stakeholder, I think it&#39s a situation where the customer is always going to win. The pressure is now on companies who haven&#39t ar-ranged for it to now do it. I think there will be pressure from the media. Providers will have to reduce charges when stakeholder comes in or pull out altogether.&#34

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