The introduction of a 1.5 per cent price cap on child trust funds is being heralded by the industry as a climbdown by the Government but the victory dance may be short-lived if the move is not repeated across the entire Sandler range.
The argument that the Treasury has used to justify the price cap indicates that it believes child trust funds are a special case and need to be made as attractive as possible to lure potential distributors.
But Clerical Medical head of industry affairs Nigel Stammers says the Treasury's argument that child trust funds will be very small could be applied to other products such as small pension schemes.
Scottish Widows marketing director Peter Jordan believes that raising the price cap from 1 per cent to 1.5 per cent across the range of Sandler products could make working in a multi-tied environment more attractive to companies which have so far held back on this option.
He says: “A more realistic price cap could make it easier to offer a simplified product range for multi-ties but this is only if it becomes the norm for all products.”
But not everyone is so pleased by the Treasury's U-turn. Consumers' Association senior policy adviser Mick McAteer believes the most vulnerable consumers will be priced out of the market if the Treasury gives in to industry pressure and fails to move away from the retail distribution model for the Sandler products.
McAteer says: “I hope this charge will not come in across the board. We think the Treasury has a duty to consumers to implement this in the most cost-effective way possible and struggle to understand the reasoning behind raising the cap. Child trust funds and stakeholder pensions involve a considerable amount of taxpayers' money and you would think it would have more interest in protecting this.”
But Jordan predicts that a price war could emerge between providers which have planned strategies around the 1 per cent cap and those which are now considering whether they could operate at 1.5 per cent. He says: “The question is does this new charge change the ball game altogether? It will be key to see what the crazy gang who nailed their flag to the 1 per cent mark will do now. A price war could emerge.”
Jordan says providers which have already planned for 1 per cent, such as Legal & General, will be looking at what they could do with the extra money.
He says: “The chances are they would not use the extra 0.5 per cent for distribution but could use this for further product development. The Sandler products were very prescriptive, whereas now there is quite clearly more opportunity and no one will be moaning about that.”
But Legal & General head of publicity and public relations John Morgan says L&G would be more inclined to push any extra revenue straight back into IFA distribution. He says: “We are encouraged by the Treasury's announcement. We are already in the Isa and stakeholder pension market and 1.5 per cent would help broaden this area of the market. Any extra funds would probably be channelled into distribution. IFAs should benefit from it.”
But L&G says it has no plans to offer child trust funds despite the higher cap. Morgan says: “We are already involved in the investment side of the Sandler range but we are not particularly interested in the child trust fund.”
The Treasury is thought to have settled on a minimum monthly contribution of £10 a for child trust funds – compared with the £20 needed for stakeholder pensions – following pressure from the industry to make the plans more workable .
The Children's Mutual chief executive David White points out that providers can expect to receive just £4.70 in charges in the first year where parents invest the £250 received from the Government plus an additional contribution of £10 a month. He expects all the charges will be used to explain parents' choices and exactly how the child trust fund works.
F&C management director and head of UK retail marketing Georgette Harrison believes the 1.5 per cent cap is a clear indication that the Treasury has listened to providers which were keen to offer a child trust fund but were deterred by the 1 per cent cap.
She says it is particularly good news for investment trust providers that the Inland Revenue has decided to exclude stamp duty from the price cap as this will allow consumers to benefit from a full range of investment choices for their child trust fund.
At a recent meeting of the Treasury select committee, Ron Sandler said he thought providers were concerned that price caps would expand to other areas of their business and this was one of their main gripes about the 1 per cent level. Asked if he was disappointed by industry reaction to his suggestion of a 1 per cent cap, he said: “I think this is to be expected. I may express a degree of disappointment that the industry has not seen this as an opportunity to address a whole part of the market which is currently unaddressed and not seen it as a commercial opportunity.”
Sandler failed to mention the possibility that the Treasury could backtrack on the 1 per cent cap and claimed he was now “on the periphery” of discussions on how the simplified range would be implemented. It would appear the timing of the cap increase coming so soon after Sandler's comments would indicate that this could be the case.