Standard Life warns that the majority of fund offerings breach stakeholder rules
Tracker funds are not acceptable options as stakeholder investments as they contain investment trusts, the cost of which lifts them above 1% .
Standard Life has written to advisers outlining its belief that the majority of investment fund offerings under stakeholder are not compliant, as they are often trackers, unit trusts or Oeics.
Investment trusts are excluded from the definition of securities which are acceptable holdings for stakeholder. As such stamp duty and other dealing costs have to be added on top of the management charge, it is almost impossible to buy into them within the 1% cap, Barry O'Dwyer, pensions marketing manager at Standard Life, said.
Standard Life has recently established its first external fund link to the Baillie Gifford Managed Pension fund, which holds investment trusts, but O'Dwyer said Standard Life pays the charges separately so it does not come from the fund.
Trackers that use sampling are also unlikely to be compliant because they often practise stock lending, O'Dwyer added. 'Some of the profits made from stock lending are taken by the manager rather than being reinvested in the fund,' he said. 'This is not compliant with the regulations which state that all income and capital gains must accrue to the fund.'
Colin Bell, technical pensions adviser at Scottish Equitable agreed, it was unlikely any tracker was compliant as even though the costs of the investment trust can be diluted it is still likely to lift the cost above the 1% cap. Some stakeholder products may also be linking to external unit trusts, which use dual pricing. Stakeholder rules specify the need for a single price on the investment fund.
Single-priced unit trusts are available through a method known as swinging single pricing in which the manager determines each day a level the fund will be priced, either bid or offer, but it can not move throughout the course of the day. This method was allowed by the FSA when Cat standard Isas were created with the requirement for a single price.
However, groups have been reluctant to use swinging single pricing as it would be administratively bothersome to change the pricing of a unit trust just for it to be acceptable for stakeholder investments, O'Dwyer said.
Sheila Nicol, deputy director general at Autif, said it was aware of the issue and noted investment groups have been waiting for the up-coming FSA consultation document on single pricing, expected to be published in the autumn.
O'Dwyer predicted that these issues would come to the fore in April when the reporting accountant of each company has to declare whether it is complying with stakeholder regulations. He said that if providers were found to be in breach, Opra would have to take action.
Both Scottish Widows and Scottish Equitable said they have heard of these issues but have ensured their investment links are compliant under stakeholder.
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