The ABI is wasting its time in lobbying to get with profits included in stakeholder. With-profits ha...
The ABI is wasting its time in lobbying to get with profits included in stakeholder. With-profits has hidden costs, such as the market value adjuster, and extra charges to pay for the smoothing of returns, both of which the ABI think can be accommodated by adding in a discretionary 0.5% charge on top of the basic stakeholder 1%.
The Government is not going to tear up the rulebook on its forthcoming flagship pensions regime just to keep the life industry happy. Having stated its commitment to transparency and a fixed maximum charge, letting in with-profits really would be the thick end of the wedge.
The product cannot be made transparent when it comes to charges. If the life industry has failed to come up with a simple structure for with products then the civil service is unlikely to stumble on a formula.
But what has with-profits got going for it which might make it worth the Government relenting on the whole charging structure for stakeholder?
The attempt to include with-profits does throw up a serious issue when it comes to the investment strategy behind stakeholder.
The great advantage of with-profits is the diversification of assets backing it from equity and bonds to property. As such it is a much better basic investment vehicle than a tracker, where the investor is linked to the fortunes of one stock market.
Unfortunately, diversification can be achieved through a managed fund and a managed fund should have far greater transparency in its charging structure.
One of the arguments in favour of with-profits is the benefit of smoothed returns and the element of protection that a life company will provide to the policyholder when the world's markets start to misbehave and head south.
When it comes to a pension the investment is for the long term and cannot be touched until retirement. As a result the smoothed effect, or partial guarantee, becomes less important. It will act as a drag on investment performance in most cases. Those who want to take less risk should be allowed to do so - they can increase their exposure to lower risk assets or buy into a fund that has downside protection. One thing that should be included in stakeholder is the protected fund.
With-profits has proved to be a good investment vehicle for many but it should remain outside the stakeholder environment. The protection levels and investment diversification that will be needed in stakeholder can be provided in more transparent ways.
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