More consultation on Stakeholder Pensions
The Government guys are at it again with the consultation thing, this time on Stakeholder Pensions. The consultation period, which this time is mercifully short, ends on 17th December and theyíre looking for our views on their proposals to hold the charge cap at 1% for existing Stakeholder Pension holders and to introduce so-called Ďlifestylingí to the Stakeholder product structure.
These two changes are being made so that Stakeholder Pensions can take their place as part of the new suite of Stakeholder products that are intended to be sold through the new basic advice process. As well as the re-vamped Stakeholder Pension this Ďsuiteí will include a deposit account, a medium-term savings product and the Child Trust Fund. The idea is that these new Ďsimple and comprehensibleí products will be sufficiently tightly regulated to ensure that they can be purchased safely without full regulated advice. As youíll probably imagine when I hear things like that said about pensions it starts all my involuntary twitches off again, but Iíll come back to that in a minute.
The bones of these announcements are:
- The new 1.5% charge cap on Stakeholder Pensions will come into effect in April 2005, but the cap on existing products at that point will be held at 1%.
- The Stakeholder Pension savings of people who do not want to make their own investment choices will start to be moved into less volatile investments at least five years before retirement in order to reduce the risk of a sudden drop in value just before retirement.
Now, I know Iíve written loads about this stuff before, but I suppose itís still worth saying one more time. All of this has come about because of the findings of the Sandler Review (of medium and long-term retail savings in the UK) which came out in 2002. That review concluded that there were a number of problems with the long-term savings industry, for example product complexity and jargon being difficult to understand. It was thought that this made it difficult for lower or middle income consumers to access financial products.
Well, I can see that may be the case for simple and undo-able products like savings and deposit accounts, but it really is stretching things too far to include pension products, any pension products, in such a group. The real problem with pensions in the UK today is that they are not suitable investments for millions of people in the workforce because of the particular way that pension savings interact with means-tested benefits for pensioners. This is unfortunate and acts as a real brake on the wider distribution of pensions among the UK workforce. In my day job I havenít met anybody, other than those in the Government, who doesnít agree with that.
Making pensions cheaper, in the way that Easyjet make plane travel cheaper, is not the way to do things with pensions, compelling as it may seem. A pension product that is not suitable for someone doesnít become suitable just because itís cheap. Cheap and unsuitable is still unsuitable. The opposite is true too. A product that is unsuitable at 1%, wonít become magically suitable because the price is raised to 1.5%. We shouldnít get sucked into any argument that says it is possible for products to be partly suitable either. Thatís as nonsensical to me as the idea of being partly pregnant, or partly dead. Products are either suitable for someone or they are not, there is no middle ground.
I suppose the air travel analogy is a good one. Flying on planes will never be entirely safe, but we are happy to do so because we can be confident that the Governments around the world have put in place a strong regulatory environment that ensures air traffic is safely controlled and that airport security and such is maintained. The macro environment, if you like, is properly controlled by sensible regulations and airline companies can build their businesses within it.
What we need if we are to be able to safely and successfully distribute pensions more widely is for the macro pensions environment to be built in such a way as to make it intrinsically suitable for everyone in the workforce to save in a pension scheme. Those saving need the assurance that every pound saved in a pension will make them at least one pound better off than those who choose not to save. It is this macro environment that we need our Government to urgently work on.
What we have, though, is an apparent acceptance of the existing poor state of affairs in the macro environment and Government instead concentrating on designing the pension products for us. Iím not sure thatís the best way of doing things any more than Iíd be happy to fly if there was no air traffic control, but I had the benefit of knowing that Government ministers had themselves designed and built the plane.
The design of our pension products, however well done, is of far less importance in the overall scheme of things than the suitability of our pension products for individuals. While the suitability or otherwise depends on the exact financial position and pension history of each of the 25 million people in the UK workforce, we are not going to be able to properly distribute them other than one at a time and at great expense.
Now, Iím sorry if Iíve gone on a bit about that, but I really do think it is the most important issue in pensions today and itís actually given me an idea. The new facility we have on the BeeHive for recording votes gives us the opportunity to feed something directly into this round of consultation. It would be good if we could add the views of a couple of thousand pension practitioners into the pot by 17th December, so I think Iíll put another voting topic on the site from Monday next week to get that rolling. Before I do that, anyone who wants to can register their vote on our current topic by clicking here.
4 November 2004
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