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With-profits and losses

New Labour could be forgiven fornot liking the pension industry, itcould

be forgiven for not liking with-profits but will it be forgiven for liking

theelectorate even less?

Its final regulations for stakeholderpensions effectively ban providers

from offering the traditional safe route of with-profits investment to

stakeholder savers. But up to 70 per cent of existing group personal

pension investors and the majority of the industry say the regulations are

wrong and with-profits investment is ideal for the stakeholder market.

Perhaps the Government does not understand with-profits investment,

perhaps it thinks providers can skim more than 1 per cent off a

with-profits fund in charges because the package is less explicit. But one

thing is certain – a with-profits pension will not plummet in value the day

before retirement. Most of the alternatives could.

The aim of a with-profits fund is to smooth equity returns.

Scottish Life head of communications Alasdair Buchanan says: “We think

that, for the stakeholder target market in particular, with-profits is the

route. It gives access to something which will not fluctuate wildly.”

The ABI is furious that the option of with-profits has been denied to the

stakeholder market. A source says throughout the three years of

consultation on stakeholder, it has constantly lobbied for the inclusion of

with-profits because it offers a reliable option for people investing for

the first time.

The source says: “It is inappropriate for less well-off investors to be

exposed to 100 per cent equity investment.”

The ABI will be writing to the Government to express its concerns. “I

think the letter will say, you&#39ll be sorry and don&#39t blame us for the low

take-up,” says the source.

With-profits investment works by adding profits to a policy

throughbonuses. These are backed by gilts and guaranteed at retirement. But

the policyholder is also exposed to equities because a with-profits fund

has more assets than liabilities so it can afford to invest in equities and

pay a proportion of the gain to policyholders.

The Government says it wants stakeholders to benefit from with-profits.

A Department of Social Security spokesman says: “The Government has said

you can offer with-profits policies.”

But its rules say any fund has to be ringfenced and can only take in money

from stakeholders.

Scottish Mutual pensions development director Leslie Gray says thisis

equivalent to one step forward and two steps back. “You have got no

capitalto help with the smoothing and guar-antees,” he says.

National Mutual deputy managing director Graeme Laws says: “If you try to

do a ringfenced with-profits fund, then the level of guarantee would be so

minimal it would not be worth it.”

The ABI source says: “It is launch-ing this product with one arm

tiedbehind its back.”

The DSS says the reason it is prop-osing a ringfenced fund is to

shieldpeople from the lack of transparency ina normal with-profits fund.

Buchanan says it does not matter whether people understand with-profitsas

long as it produces the results. “Most people do not know the workings of a

combustion engine but they&#39re still happy to buy a car and I think that is

a reasonable analogy for with-profits,” he says.

But the regulations have been laid before Parliament and the industry is

going to have to get on with prov-iding stakeholder within its constraints,

according to the DSS. “It is undoubt-edly a challenging position,” saysthe


Shadow pension spokesman Jaqui Lait says the Tories are concerned atthe

lack of coherence in the Government&#39s pension policy.

She says: “You have to ask yourself where it thinks its pension policy is

going. I have never been certain as to why it does not like with-profits.

It is probably a lack of understanding of how the system works.”

Lait says there will be a debate about the stakeholder regulations.

However, there is no guarantee that it will amount to anything.

So, if stakeholders cannot have the security of a with-profits fund, where

can they go to make sure their retirement fund is not wiped out in the

months before they retire?

Scottish Equitable pensions development manager Steven Cameron saysone

option would be a guaranteed fund where derivatives are used to hedge

against losses but the fund still participates in gains.

There are some drawbacks with this route. Cameron says: “Buying

derivatives is an expensive business and, as a result, the returns are

likely to be lower than with-profits. You have also got to ask how many

stakeholder policyholders would be happy investing in what is perceived as

risky derivatives.”

Laws says: “In a volatile stock-market, the problem is that the priceof

the option which underpins it is very expensive.”

Figures from Standard & Poor&#39s show over the last five years, theaverage

with-profits investment has returned 42 per cent whereas the average

guaranteed fund investment has returned 48 per cent.

Although this is only the short story, stakeholder investments will take

place over a much longer timescale and Laws says another option for

investment planning could be lifestyle investment.

Lifestyle investment is where a provider invests money for younger lives

in equities and gradually switches into safer investments such as giltsto

lock in gains in the years approaching retirement.

However, Laws says these are only options and nothing can be a blanket


He says stakeholder investments could be for 30 years or more and it is

ridiculous to try to make savers take a particular investment route for

the duration of their saving life. “The idea that you can sit in front of

someone and navigate the next 30 years of their life is, frankly, bizarre,”

he says.

Laws says the debate over with-profits and alternative investments brings

the whole stakeholder issue full circle.

“Where do stakeholders go to get advice in 30 years time? The answer is

that they will probably need someindependent advice and I think somebody

should have thought of this atthe outset,” he says.


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