The stakeholder pension will, of course, have a huge impact on the life assurance industry. It compl...
The stakeholder pension will, of course, have a huge impact on the life assurance industry. It completely changes the business model from the life assurance business model to the investment fund model. The life assurance model typically locked people into long-term contracts, made sure they got extremely poor value if they did not last the course, and had to be poor value because the product manufacturers required all their distribution and set-up costs to be recovered in the early years.
The long-term costs could be made to look low because so few investors lasted the full term, so they could be cross-subsidised from the poor people who left early with enormously high costs.
By contrast the investment fund model has been one where the product provider normally makes a loss in the early years and needs to retain the client in the product for seven to eight years before a return is made, even though the client can get out at any time with little or no penalty. The investment fund industry is familiar with the stakeholder model, understanding that the product needs to be well sold and that customer service needs to be maintained at a high level.
It follows from this and from other considerations that a number of familiar life products will wither on the vine. In particular the with-profits based products have little to offer in this environment. They will be suitable investments for a very small part of the population.
Ian Reynolds, senior FSA actuary, said: "When is a with-profits policy a good with-profits policy? When it is a pensions annuity policy. The only good with-profits policy is a pension annuity policy.
"How does a pension policy holder aged 35 benefit from having a smoothed equity return over the next 10 years of their contract? At 45 they will still be 15 or more years away from retirement. The only argument in favour is that the poor, ignorant policy holder will not be disturbed by seeing the value of the fund going up and down in line with the market. But this is condescending and misses the whole point of the investment which is to provide an income in retirement.
"If the policy holder is worried about volatility along the way, I suspect the nature of the policy has not been properly communicated."
I should add that Ian's remarks were written before the latest news on endowments broke, back on 27 July 2000.
Or listen to an IFA:
"With-profit bonds are easy to sell because they are made to appear safe but they are not. They are marketed as being tax-free, but they are taxed at source. You are told you can take an income, but that is your own money." (David Hanratty, Nelson Money Management, Independent 27 September 2000.)
The life assurance industry has also to alter its marketing and distribution strategies, as current methods are unlikely to be open to them under a stakeholder regime.
Of course some companies and individuals will understand this sooner than others. It still astonishes me to see the life companies pumping out with profit bonds, increasing commissions as they go, seeming to have learnt nothing from their recent past. On the other hand others are now offering outstandingly good pensions.
It is because this behaviour and these products continue that the ABI's SALTR project is doomed to be little more than an interesting PR exercise. If the SALTR project had refused to accredit any brands which included with-profits products, then the label would have been worthwhile.
Thus, within five years, assuming the Government does level the playing field on tax between investment funds and life assurance products, the only market for life assurance products will be in those few cases of high net worth individuals where the tax structure of life products produces genuine benefit. Aside from that the life industry will return to what it does best and which only it can do. Insuring against death.
None of this means the stakeholder hands the business on a plate to the investment funds industry. It is quite clear from watching the market that there are a number of life companies who really do have the financial muscle and an understanding of what is required, and who will clearly be the early winners in the stakeholder market.
Moreover, the investment funds industry has to be very careful to ensure it does not build in malpractices similar to the insurance industry. Some of the performance advertising perpetrated by my industry is, in my opinion, misleading. It can only be a matter of time before either the FSA does something about it or individuals start complaining to the Advertising Standards Authority.
And aside from specific adverts there is a more general problem which the industry needs to be careful about. We have watched in recent weeks the distress caused when people find that endowment policies will not repay their mortgages. I believe the problem lies with the marketing of the products as much as the products themselves.
Here, and in the US, investors have got used to double digit rates of nominal return. There will come a time when, if the low inflation environment we are in now persists, nominal rates of return will fall even if real rates of return stay as high, if not higher. My industry would do well to ask itself whether continuing to build expectations on past rates of nominal return is a sensible policy.
The market for advice in this country, again led by the insurance industry, has developed under the benign eye of a regulator dominated in its early stages by life executives, as one which sees advice as a one-off transaction. The stakeholder pension, on the other hand, will demand advisers who are more in the nature of financial planners offering continuing advice to clients and who must be competent in offering investment advice.
It is one of the oddities of the PIA rules, compared with the SFA rules, that to ad
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