Should more pension funds switch out of equities as Boots has?
Steve Folkard: Risk management is a fundamental issue for companies and pension fund trustees alike. The decision taken by Boots would be specific to the liabilities of the scheme and the attitude of its trustees and their professional advisers to the relationship between that risk and the potential for future returns from equities or other classes of assets.
The issue as it relates to stakeholder or personal pensions is quite different. The individual has, in most cases, a choice of funds with different investment strategies and varying risk profiles. So the individual decides what is appropriate for him or her, given their personal circumstances. It is important, therefore, that customers under- stand what they are investing in and review it regularly with the help of a professional financial adviser.
Martin Clarke: Clearly, this is a decision for each set of trustees to take in association with their advisers. It may well be that the current climate of low interest rates and stockmarket uncertainty, together with the funding pressures facing pension schemes, does continue to affect the asset class make-up of pension funds. Whether this means more companies will follow the same route as Boots is far more difficult to predict.
Michael Craig: Boots has taken the decision based on its own circumstances and for its own reasons. It should not set a precedent for all other defined-benefit schemes. How- ever, it is clear that tests such as the minimum funding requirement and the new financial reporting standard FRS17 can result in unexpected charges against income or capital for the sponsoring employer.
The problem arises because these tests value some liabilities with reference to bond yields when the actual assets of the scheme are invested predominantly in equities. This asset/liability mismatch may encourage some schemes to switch to bonds to reduce the risk of failing these tests.
Will the pension comparative tables be useful to consumers?
Steve Folkard: Any comparative information is useful to a degree and these tables do allow customers to make judgements between providers based solely on charges. If that is their only criterion, then such tables are a very useful tool. However, there are a number of consumer publications which for years have done a great job in providing a much wider range of information on pension products. Even when they cover both charges and investment performance, they can still be criticised for failing to account for such things as the provider's financial position.
The fact is that there is
far more to making a buying decision than the cost of the product, particularly where the differences in cost are marginal, as with stakehol- der pensions.
Martin Clarke: Maybe. If consumers see them as a general guide, that stimulates them to seek further financial advice and guidance. The tables only give half the story, however, as they concentrate on product features and price. That could compare with buying a car without knowing the service history or, indeed, the make and model most suited to your needs.
For the tables to be really useful, they need to cover more than just the nuts and bolts of a product. For example, we would welcome the inclusion of the Raising Standards quality mark within the tables as it seems somewhat erroneous that this is not included but that Catmarks are.
Michael Craig: In theory, comparative tables should be a powerful tool for consumers, allowing them to compare products quickly and easily. The industry will also benefit, as this greater spirit of openness helps build consumer trust. However, there are two main concerns with these tables.
The omission of important information, such as service quality and the financial strength of the product provider, prevents the consumer from making an objective choice. The second concern is that consumers may focus purely on price. For pensions, it is vital that customers choose a fund that suits their attitude to risk, number of years to retirement and the form in which they will take their pension.
How can the FSA factor in the performance of pen-
sion funds in the tables?
Steve Folkard: Arguably, investment performance is more important than charges as a deciding factor when choosing a pension provider. However, crystal ball gazing has always been a difficult art. So, naturally, we tend to use historical evidence.
The huge choice of funds with different investment objectives, strategies and risk profiles makes it extremely difficult to present even historical data in a simple format. The danger in providing more and more data is that customers may become confused and put off by information overload. Nevertheless, including past performance tables is to be commended and might encourage customers to take advice about the complexities of their investment decision.
Martin Clarke: The information needs to be presented in a format which the consumer is able to understand and relate to. As the tables are not updated regularly, star ratings such as those awarded by Micropal for unit-linked funds or colour codes may be the easiest indicators to use and should be assessed in a consistent manner. This would provide appropriate and sufficient detail for the customer although a clear explanation (with the usual health warnings) would also be needed to indicate how the ratings have been applied.
With regards to with-profits funds, a short independent commentary given by an independent industry expert such as Ned Cazalet could provide meaningful information on the management and financial strength of each fund.
Michael Craig: The inclusion of investment performance in FSA comparison tables is not straightforward. For investment-linked products, past performance over various periods could perhaps be shown alongside the other information. However, as stakeholder has created a number of new fund launches, the performance shown may be for a different fund from those available currently. These historic funds may also have been priced differently.
Another problem comes when you introduce with-profits. Here, the charges within the product cannot be separated from the investment performance. This means that the performance reported could reflect a product charging structure that may have been phased out years earlier. Further, the volatility of the fund should also be taken into account in some way when assessing absolute and relative investment returns.
Perhaps the most consumer-friendly approach would be to categorise funds according to some simple measure of volatility, for example, low, medium or high, and to rate each fund according to its performance against funds of comparable volatility.
Should the 1 per cent price cap on stakeholder pensions be reviewed?
Steve Folkard: What? Another review? Aren't there enough already? It is well known that the industry initially complained about the 1 per cent charge cap. Nevertheless, quite a few of us took the plunge and have invested heavily in new ways of handling this business. If some providers withdraw, voluntarily or otherwise, and consumer choice suffers, there may be a strong argument to review the charge cap. But that is for the future.
Remember that a review would have huge implications for the advisory process at a time when the profession has only just completed a consultation of its corporate clients.
Martin Clarke: No individual review on any aspect of stakeholder should be carried out without first considering the bigger picture. Clearly, there is more work needed in terms of defining the roles played by state and private sector, then conveying this to the public. It is unlikely that any change in price would dramatically improve matters.
If the cap was to be reviewed and increased, then a valid consumer reason must be given and a strong case made for its need.
Michael Craig: The recently published Oliver Wyman study commissioned by the ABI highlights the effect that the current cap on charges may be having on less wealthy people saving for retirement. The study shows that this group will only save if they are encouraged to do so through good quality advice. However, the cost of providing this advice often exceeds the remuneration generated on smaller investments into stake- holder. More advisers could be encouraged to target lower and middle-income earners if the available remuneration was increased.
However, it is not inconceivable that advice could be paid for independently from the product charges. It is possible that a workable alternative could come out of the Sandler review.
In what circumstances do you think that Opra is most likely to fine employers?
Steve Folkard: There has been some suggestion that up to 60,000 employers have been reported to Opra since the beginning of April. Most of these have apparently failed in their duty to make contributions to personal pension schemes within the required time limits. A much smaller proportion are employers which have not designated a stakeholder scheme for employees.
With such large numbers to deal with, I suspect Opra will look at multiple offenders first but treat them with a light touch. Since the main driver behind stakeholder has been the provision by employers of access to a pension scheme for their staff, I would expect that to remain the priority for Opra. But a significant fine for smaller companies could have serious implications for staff numbers if a business is operating on tight margins.
Compliance with the requirement to provide access should be the preferred outcome of any Opra investigation rather than a fine. It may be some time before we see the first £50,000 fine.
Martin Clarke: I do not believe that fining a company will ultimately help address the real problems of take-up and underprovision. I believe that providers could work more with Opra to establish a methodology for assisting these employers – education and support is likely to produce better results than simply imposing a hefty fine.
The obvious social benefits of widespread stakeholder take up could be achieved, for example, if improved corporation tax benefits were given to enlightened employers as opposed to financial punishment for not meeting the regulations.
Michael Craig: Initially at least, Opra is likely to be reasonably lenient towards employers, particularly if they can demonstrate that they do have plans in place to ensure adherence to the stakeholder regulations. By far the most common reason for levying fines, however, is likely to be for late payment of contributions.