The UK government has struggled since it took office in 1997 to find ways of achieving the impossible: making people without spare cash save money for retirement. Its initial idea – the so-called “stakeholder” pension offered by UK life and pensions companies, but with an expense cap of 1 per cent – proved unpopular with providers and, in common with most tax-based initiatives, was taken up mainly by people who saved already. Indeed, many bought stakeholders for their children.
So the UK government has now seized on the suggestion that cheaper and simpler savings products (so-called “stakeholder investment products”) be made available by providers, as proposed by former Lloyd’s of London CEO Ron Sandler in his official report last year. But actuarial and management consultants Tillinghast – Towers Perrin are warning that these will also fail to ensure that low to middle income consumers will start to save. “Quite simply, many companies will decide not to offer them to the target market because, based on a capped charge, they are financially unattractive,” argues Tillinghast.
Whilst the Government is yet to confirm the charge cap, Tillinghast says that a 1% charge cap could mean that even highly efficient providers would face losses of up to 20-30% of the annual contributions paid into them. The firm adds that the proposed low charging structure makes inadequate allowance for the cost of providing advice and assistance which many in the target audience will need. “Because there is little incentive to offer or promote these products, there will be limited penetration of the target market of low to middle income earners,” predicts Tillinghast.
Tillinghast believes that the only way to encourage providers to develop and promote these new products is to amend the charging structure to allow for the cost of advice and assistance, and that this would best be achieved by introducing an initial charge cap of 5%, in addition to a proposed charge cap of 1% of the fund. Unless this happens, it warns, sales will again be made mainly to more affluent consumers, who tend to invest higher than average contributions and are therefore better economic prospects. Providers aiming at those on lower incomes will have to rely on passive approaches, which experience shows will result in lower take-up rates. This is exactly the pattern seen with stakeholder pension plans, which helps to explain why the average monthly contribution is a relatively high 140.
“I see a future with parallel products,” says Andy Cherkas, a principal at Tillinghast. ” Those with a price cap and those without – the latter group will be linked to an advice proposition and arguably therefore more suitable. Whether we like it or not, take up of financial products is heavily dependent on active intervention from product providers and distributors. The key to closing the savings gap is to increase the number of people saving rather than simply re-directing existing savings into stakeholder products or increasing the amount saved by existing savers. This requires an increase in the selling capacity focused on the target market in a way which reconciles supplier economics with consumer interests. To help achieve this, our analysis suggests that in addition to a proposed annual charge cap of 1%, there should be an initial charge capped at 5%, which helps to cover the up front assistance people need in making financial provision for the future.”