Consultants Mercer today welcomed the Sandler Report, a government commissioned inquiry into the future of the retail savings industry in the UK. Despite its call for the effective socialisation of the UK savings business – via mixture of price controls and officially sponsored consolidation – and an outspoken attack by Fidelity on its preference for indexed over actively managed products the report seems to have played better with Mercer.
“We welcome the creation of a market with simpler products,” says Tim Keogh, European Partner at Mercer Human Resource Consulting. “Good on Sandler for flagging up that what goes for the industry goes for the Chancellor as well. We’ve seen how tax break changes just move savings rather than increase them – as with stakeholder pensions being sold to children of wealthy individuals.”
But the enthusiasm of Keogh is tempered by criticism. “It’s disappointing that, while removing the disincentives, Sandler has not proposed any radical new measures that will actively encourage people to save,” says Keogh. “In this respect, his proposals will not extend savings coverage – people on lower earnings have limited ability to save, and will certainly not do so if means testing reduces the benefits. Their appetite for equity market risks is at best unproven. Sandler says the Pensions Credit will solve this problem – we do not agree as it still offers a 40 per cent marginal tax rate to poor pensioners. But the landscape may be reformed for those who save already, and that is no bad thing. As we all live longer and have less state support to rely on, effective operation of the savings system is essential for society. If this means a reduction in the number of providers and products in the interests of efficiency, so be it. Let us hope the detailed implementation does not spoil that vision.”
Andrew Kirton, UK Head of Mercer Investment Consulting, is also cautiously optimistic. “We welcome the recognition that active as well as passive investment has a role to play – even with ‘cheap and cheerful’ products,” he says. “Some have suggested the new stakeholder products would be entirely passively invested, but Sandler offers the chance of a mixture of active and passive products, just as institutional investors use. His ideas on the asset allocation of managed funds are sensible in principle but may require care in implementation. It is right that simple products available with little advice should be well diversified, but the inclusion of a compulsory fixed interest component is wrong. Among other things, it means that many existing stakeholder pensions established by employers and with carefully thought out investment strategies would no longer meet the criteria. This cannot be a sensible step forward. Sandler may be asking too much with his proposals for with-profits policies, which must be all things to all men in terms of smoothing, transparency and ease of transferability. However, the prize is significant – smoothing is very valuable to investors, and the marketplace needs to deliver this in a cost-effective way, with limited exit penalties. We therefore await developments with interest.”