Despite the current industry focus on stakeholder, there is still a sizeable personal pension market among people looking for additional features
We all know that we only have 1% to play with on a stakeholder pension. However, all the evidence suggests there is still a sizeable personal pension (PP) market out there for customers who want added value features.
For customers who require wider external fund links for example, a stakeholder pension may not be the most suitable product. In addition, many customers may still rather see their adviser paid by way of commission from the product rather than by a more up-front and tax-inefficient fee out of their pocket, and as such a true stakeholder pension may again not be appropriate. By allowing an overall net charge on the product greater than 1%, additional options and commission can be built into a personal pension.
Most providers seem to be offering a PP as well as a stakeholder scheme. The charge on these PPs can of course be higher than 1% overall, and most providers appear to have gone down the greater than 1% annual management charge (AMC) route rather than taking charges in other ways.
In the individual and group PP markets, based on anecdotal evidence, the likes of Scottish Mutual, Widows, Amicable and Equitable have all written business with an annual fund charge greater than 1%. Norwich Union is perhaps unique in that on the Your Pension Select PP, we went down a different route and on top of a fixed 1% annual charge, a small temporary front-end load can be built in.
Chart 1 right illustrates alternative ways of taking charges from a PP in order to generate higher levels of commission. This is compared against a typical stakeholder benchmark.
The first bar shows as a base a typical stakeholder product, that is 100% allocation, 1% AMC, paying 45% LAUTRO initial commission. The middle bar shows, on the same typical assumptions, by how much the AMC needs to increase to generate 75% LAUTRO. The third bar shows that the same higher amount of commission can be generated by alternatively having a temporary reduced allocation period (95% for two years, for example) but keeping the annual fund charge at 1%.
In terms of overall provider profitability, the two alternative methods of charging for additional commission illustrated below are roughly equivalent (although this does vary for different terms and contribution levels). However, they will result in a very different profile of charge income.
Chart 2 right shows what these different profiles might look like under the two methods for a typical policy of £100 per month.
More of the total charges are collected earlier under the temporary reduced allocation method. In this simplified example, it takes approximately seven years for the same amount of charges to be collected through a higher AMC. Thereafter, as the fund grows, the higher AMC method results in much higher charges going to the provider and all other things being equal a worse deal for the consumer.
What this means is that, with the temporary reduced allocation method, the product provider is less vulnerable to policies going off the books as more of the cost of commission is funded through charges collected in the earlier years.
In other words, the provider is more exposed to not receiving the future charges where they are collected via a higher AMC over a longer term.
Your Pension Select at Norwich Union has a regular premium option of a 95% allocation rate for two years only. This can provide up to 75% LAUTRO plus 2.5% renewal commission (there are other options as well including level commission and a 97.5% allocation rate). After the two-year reduced allocation period, the allocation rate goes back up to 100%. Therefore, after two years, as far as charges go, the product can be in line with stakeholder. This is even true where there are increments on the policy as there is the option of having increments allocated at 100% rather than starting a new 95% allocation period for each new increment.
In addition, the AMC reduces in steps as the fund value grows. Currently, the lowest AMC is 0.25% for funds of £100,000 or more (where the policy has been in existence for at least five years).
When we were designing Your Pension Select, we looked at the more common extra AMC method of loading for higher commission. After extensive research, our view was that the reduced allocation period method would be preferable to ourselves, to intermediaries and to the end customer.
After a relatively short period of time, the small initial charge is removed and so the business is less at risk from transferring to stakeholder (itself being by then in line with stakeholder charges).
With a 1% plus AMC, there will be the constant threat of the policyholder wanting to transfer over to another provider or adviser who can offer cheaper terms. Anyone who has looked at the model for the 1% world will understand how vital to success good persistency levels are for providers and advisers alike.
Although Your Pension Select is therefore not monocharge but duocharge, we firmly believe that the approach we have adopted is beneficial to all parties and it is perhaps surprising that more competitors have not chosen to go down the same route. Taking the same charges via an additional AMC results in a much higher initial strain to the provider and leaves it open to early PUPs and transfers.
It remains to be seen whether or not the duocharge approach is one that is preferred by the marketplace, but it could clearly also be used to generate additional levels of commission in other product lines as well, such as the executive pensions market. Single charged pensions should not be seen as sacrosanct ' consumers and advisers should not lose sight of an overall product design that offers good value for money and more flexibility.
Lessons can usually be learnt from other markets and it is interesting to note what is happening in Ireland at the moment. In Ireland, Personal Retirement Savings Accounts are to be launched in 2002. The model they are using there takes many of the stakeholder concepts from the UK but crucially the cap on charges will not be set at 1%. Recognising the importance of advice, the maximum charge can be up to 5% of each premium plus a 1% annual fund charge, leaving greater scope for the cost of advice.
In summary, there are clearly many ways to crack the same nut. Most providers appear to favour going above a 1% annual charge to fund higher levels of commission, but alternative designs should be carefully considered and may offer better value and encourage loyalty.
Stakeholder may not be the best product for people who want wider external fund links.
Despite the publicity for stakeholder, there should still be a sizeable personal pension market.
Most providers are offering personal pensions as well as stakeholder.
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