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Why the cap fits

There has been a great amount of comment and debate since Ron Sandler published his report into the savings market in 2002.

I consider this level of debate to be a healthy thing. The key recommendation that Sandler made was for the introduction of a suite of simple, low-cost, risk-controlled products. His recommendation for a 1 per cent price cap on the sale of the products has perhaps generated the most comment and the liveliest debate.

The Government has studied the issues long and hard. In 2003, we commissioned research from Deloitte on the market impact of a range of price caps to inform our decision and we consulted with consumer groups and industry representatives. This culminated in the recent announcement that the price cap for the medium-term savings products and the pension product would be 1.5 per cent for the first 10 years and 1 per cent thereafter.

This strikes a fair balance between giving customers the best deal and making it possible for efficient providers to market and sell the products. This was always our aim and the Treasury and the FSA are now consulting on regulation and the sales process.

Nearly two million stakeholder pensions have been sold since they were launched and they clearly represent excellent value for consumers. There are those who cast doubt on their success but there can be no doubt that they have created pricing pressure on all personal pension products and the financial services industry has responded by cutting costs and improving efficiency. We welcome these efforts.

During our discussions and consultations, we have been persuaded that the industry has a legitimate concern about the profitability of undertaking stakeholder business. It is in nobody&#39s interest, least of all consumers, if stakeholder products are difficult to access or if there is insufficient competition in the market.

The relaxation of the cap together with the FSA&#39s low-cost basic advice regime answers the industry&#39s concerns on the profitability of offering stakeholder products and should encourage further competition in the stakeholder market.

We realise that, for less efficient providers, this is a challenging cap and we appreciate that some providers, for a wide variety of reasons, will not want to enter the stakeholder market but we have been encouraged by the number of providers which have said they int- end to market these products.

There will be sufficient competition when the products are introduced and the charge cap will encourage firms to look for innovative and efficient ways to distribute these products.

The price cap remains excellent value to consumers. Over 25 years, the cost to consumers is little different to a flat 1 per cent cap. It should ensure that people throughout society, particularly those on moderate incomes who have been deterred from investing due to the complexity of financial products and lengthy sales process, can access the advice they need to make important decisions about investing for the future. The basic advice process being consulted on by the FSA will enable these products to be distributed at low cost, ensuring this market can be reached.

With growing consumer awareness through the FSA&#39s financial capability strategy and the Department for Work and Pensions&#39 Informed Choice initiative, these simple products will enable consumers to make choices without needing to pay for advice if they do not want to. Low-cost execution-only distribution via the internet is expected to expand to meet this demand.

In the Budget this year, we announced support for employers who help their employees with pension decisions by exempting pension information and advice from being a taxable benefit, subject to it being generally available to all employees and below a limit of£150 for each employee per year. Together with the higher price cap, this will increase the amount of low-cost financial advice available through the workplace.

These are measures that address supply and demand, offering providers new opportunities and helping people make the right choices for a secure retirement. As the market evolves it is expected that there will be greater competition beneath the price cap, offering customers more choice. The Government will review the market in 2008 but we fully expect a successful launch for stakeholder products next year and that will be good news for providers and consumers.

Ruth Kelly is Treasury Financial Secretary

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