Stakeholder influencing reduction in yields on AVC contracts as returns fall
AVC scheme charges have been falling due to the increased competition from stakeholder pensions, according to pension consultant's Watson Wyatt AVC survey.
Historically, one of the major determinants in selecting an AVC provider has been charges and since the advent of stakeholder pensions, almost all providers have been repricing their AVC contracts, first for new business and then for existing arrangements, the survey shows.
Reduction in yield figures have fallen over the past year and in some cases the RIY on AVCs is lower than that of the 1%-fee on stakeholder.
The reduction in charges from many of the larger AVC providers has been significant in a very short period of time, according to the group. For example, the with-profits median reduction in yield for a 10 year contract with a £25 per month contribution was 2.1% per annum in 1998 and it is now 0.7%pa.
Watson Wyatt's survey shows that the average reduction in yield for a stakeholder pension is in fact 1.1%, while the RIY for over five years, £25 per month AVCs offered by Clerical Medical, Friends Provident and Legal & General, is 0.5%per annum.
The highest reduction in yield on a unit-linked AVC, at a contribution level of £25 per month, is 5.1% from Merrill Lynch pensions, while Phillips & Drew Life features 4.7% and Fidelity has a reduction in yield of 3.9%.
These figures drop to 1.8%, 1.7% and 1.6% on contributions of £100 per month, according to the survey.
Andy Parker, a senior consultant at Watson Wyatt, said the three groups are an example of the higher costs to low contributions if the company outsources the administration of the scheme.
He said: 'Most providers do not now have a fixed policy fee for new contracts where investment management and administration are undertaken in-house. However, where a third party administrator provides part of the package, the contract often still has fixed member charges.
From the responses to our survey, such charges are still applied by Fidelity, Invesco Life, Merrill Lynch Pensions, Phillips & Drew Life and Scottish Mutual.
'Unless the trustees or employer are prepared to meet these additional administration costs, they will weigh heavily on the lower levels of contributions paid. However, in fairness, this is not the target market for many AVC providers; they are effectively looking for the larger schemes with higher overall average contributions per head.'
While the costs of AVCs have fallen so has the performance of the schemes, due in most part to the fluctuating investment markets. The Watson Wyatt survey includes performance over three year periods where historically the effects of charges have been most visible.
Parker said: 'This is true again this year, however, for the future, most providers will be offering terms where the only charge is a fund-related one and thus, the impact on shorter term performance will be no different to that on the longer term performance.'
The survey shows that for regular contributions of £25 per month over a three year period, the median return for a with-profits investment has fallen to 8.4%pa. The range of returns over this time period goes from a return of -0.9%pa from Norwich Union to 11.1%pa from Scottish Life.
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