Stakeholder regulations make it virtually impossible for schemes to hold investment trusts without e...
Stakeholder regulations make it virtually impossible for schemes to hold investment trusts without exceeding the 1% cap on charges, writes Debbie Harrison.
This denies stakeholder funds access to venture capital opportunities and prevents full emulation of UK stock market indices.
Robert Hall, a partner with the consultant Watson Wyatt, said: 'The cap on charges is calculated as 1/365th of 1% of the fund per day. This does not include stamp duty and stockbrokers' commissions on trading in securities. Unfortunately, stakeholder regulations specifically exclude investment trusts from the definition of securities. This means that the 0.5% stamp duty charge and other dealing costs must be included as part of the capped charges, which makes it extremely difficult for stakeholder-compliant funds to buy investment trusts.'
While it is possible in theory to establish detailed administrative controls to allow inclusion of a limited number of investment trust shares, stakeholder providers keen to stick to the letter of the law have reluctantly banned them. Colin Ledlie, assistant general manager for marketing with Standard Life said, 'This was a deliberate move by the Department of Social Security (DSS) when it drew up the stakeholder legislation. It was concerned that some providers might invest in their own investment trusts and effectively add an extra layer of charges. Unfortunately by applying the regulation as it does, the DSS may be using a sledgehammer to crack a nut. The level of administrative control required for investment in these vehicles is very detailed. Some providers have concluded it is simply not worth the candle.'
Further difficulties arise where the stakeholder scheme offers access to external managers.
'We are very keen to stick to the letter of the law,' Ledlie said. 'This means that we have to exercise extreme care if we enter into any third party arrangements for our stakeholder scheme as we need to be sure the external managers are also sticking to the rules. We are discussing this issue with the DSS at present.'
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