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Will son of stakeholder change behaviour?

The Sandler review in July 2002 recommended that the Government should develop specifications for a suite of simple, low-cost and risk-controlled stakeholder products.

This would improve competition and access to financial services for those on lower incomes. The features of the products would enable the FSA to create a simpler sales regime, shifting the focus of regulation from the sales process to the products themselves and reduce the costs of selling the products.

In relation to pensions, the product should have strict limits on features to ensure simplicity, an annual management charge capped at 1 per cent a year and limits on investment risk. The pension product proposed by Sandler looked very similar to a typical stakeholder pension already available on the market.

The Government has published its response to Sandler in the consultation document, Proposed Product Specification for Sandler Stakeholder Products. This article considers its proposals in relation to its recommendations on a simple pension product.

The Government has recognised that stakeholder pensions available today already meet the Sandler criteria except for the control of investment risk. It proposes to build on the current stakeholder pension to minimise disruption to providers. Flexibility of investment options would continue to be available but investment restrictions would be imposed on the “default” investment option. This could be achieved in three ways.

The pension plan&#39s default option could be invested in a Sandler unitised or with-profits contract. The only advantage would appear to be simplicity. Most advisers would consider a with-profits contract to be too restrictive for a default option.

The second option is to require a form of lifestyling in the years approaching retirement. This option seems reasonable although retirement is becoming a vague concept and not a fixed point in time, as has been the case in the past.

The third option is to require “a general duty of care” on the fund manager, for example, to “diversify assets between stocks and asset classes to balance risk and return throughout the expected duration of the investment”.

This looks very vague. Fund managers would argue that they already act with a general duty of care and that they offer the means to meet these requirements through the ranges of investment funds available to planholders.

So, assuming that the proposals on pensions come into force after the consultation period (providers having until May 2003 to respond) and that the FSA feels able to lighten the regulatory burden on providers, what will be the impact on providers, advisers, and consumers especially those on low to medium incomes? The short answer is, not much.

The reason is that this target group of consumers, which has been reluctant to invest in stakeholder pensions during the last two years, has not been waiting for “son of stakeholder” to appear before embracing pension saving.

A few tweaks to the default options of today&#39s stakeholder pensions will not give them the means to save for retirement. They simply do not earn enough and where they do there may be other higher priorities such as paying off a mortgage, or credit card debts.

This consultation exercise has revived talk of a possible change of heart by the Government over the 1 per cent a year cap on charges. Either there could be a simple increase in the cap or an easement to allow advice to be charged for separately, in addition to the 1 per cent charge. While this might make the selling of stakeholder pensions more palatable for providers and less of a drain on capital, it will do little to change the behaviour of consumers and financial advisers.

A financial adviser will be wary of encouraging an individual to make voluntary pension provision if there is any likelihood that the individual&#39s pension credit may be restricted in retirement as a consequence.

Although it could be argued that it is in the interest of public policy that individuals, in general, should make voluntary pension contribution in order not to rely on the state, advising an individual with low or modest earnings to save could turn out to be a missale.

Advisers are usually good at distinguishing those who cannot afford to save now and who will never be able to save from those whose earnings are low now but which are likely to increase in the future.

The fact that stakeholder pensions have not attracted those on modest earnings could be a testimony to the financial acumen of financial advisers.


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