The Cutting Edge with John Lawson – Standard Life Pensions Ezine

Standard Life's Pensions newsletter for advisers

Issue 8, October 2007

Do charges matter?

It’s interesting to look back at some old government pension policy papers. Partnership in Pensions, a relic from 1998, is a great example. On stakeholder pensions, it says:
“The costs of stakeholder pension schemes will be kept low, by:
A. using a collective structure, like occupational schemes, to get the best value-for-money for scheme members;
B. reducing the costs of marketing and collecting contributions, by ensuring access to schemes at the workplace;
C. reducing the need for individual financial advice; and
D. having simple tax rules.”

This looks like a multiple choice question but unfortunately, the answer has proved to be “E. none of the above”.

Nine years on, we all know that the costs of stakeholder pension schemes are not particularly low. I guess that as many as eight out of ten stakeholders are sold with the maximum 1.5% annual management charge for the first ten years, falling to 1% thereafter.

RU64 assumptions
Yet advisers must still have regard to the rules set out in Regulatory Update 64 (RU64). This says advisers must document the reasons why a personal pension (including a SIPP) is at least as suitable as a stakeholder, particularly where the costs/charges under the SIPP are higher. RU64 was built upon the assumption that stakeholder is cheaper than personal pension.

Excluding advice costs, the fund management charges for Standard Life’s SIPP start at 1% for funds up to £50,000, falling to 0.7% for funds between £50,000 and £250,000. The average fund size is just above £170,000.

Even adding advice costs, the total charge for many SIPPs is still lower than the stakeholder maximum.

FSA pointers
The FSA has recently reinforced these rules in its September 2007 edition of ‘Adviser Newsletter’. It includes some noteworthy pointers for anyone advising on SIPPs.

The sale of a SIPP (where the charge is higher than a stakeholder or personal pension), cannot be justified purely because it offers greater fund choice.
Do customers really need the features and flexibility that a SIPP provides?
Do you undertake cost comparisons?
Could your client achieve his aims with a lower cost pension arrangement?

It would be wise to ensure that you comply with these points for your own SIPP sales, because the FSA intends to carry out themed visits next year.

Features of SIPP
However, the Newsletter is silent on many of the features of SIPPs that have made them one of the most popular pension wrappers around.

The access to funds at institutional prices.
The ability to agree an advice fee with your client (as proposed by the FSA in their Retail Distribution Review paper).
The transparency of a product priced at the factory gate where the customer knows exactly what he or she is paying for the product and how much he or she pays for advice.
Simple asset allocation.
Ability to borrow.
Unsecured income and phased vesting.
Alternatively secured pensions.

And whilst we’re there, what about fund performance? Surely this is equally, if not more, important than charges.

The FSA says that you should access the desired funds through the cheapest platform – whether stakeholder, personal pension or SIPP. That seems sensible enough if the cheapest platform also provides all the other features that your client needs – for example, income drawdown.

But are the funds available via stakeholder desirable? Most stakeholder fund ranges comprise the provider’s own, perhaps a few external managed funds and a few trackers.

Looking at performance
Looking at the past performance of pension funds in September 2007’s ‘Money Management’ magazine is an eye-opener. Take balanced managed funds – I would guess that managed funds are the most popular choice of stakeholder savers these days. And, for the avoidance of doubt, I am talking about the big balanced managed funds where most customers end up – those with billions or the high hundreds of millions in them. Not the ones with a few pounds in them that are wheeled out when evidence of half-decent performance is required.

None of the market-leading stakeholder providers’ balanced managed funds makes top quartile over 5 or 10 years, except Standard Life, which makes top quartile over both periods, and NFU Stakeholder2 Mixed, which is top quartile over 10 years.

Standard Life’s annualised returns over 5 and 10 years are 11.9% and 5.4% respectively. Compared to some of the other big-name insurers, our performance is, in some cases, 1% or more a year better.
Past performance is not a guide to future performance.

I’m not writing this to blow my own company’s trumpet (there are balanced managed funds that beat ours), but to illustrate the fact that fund performance can and does make as big a contribution to the end result as charges do. What’s the point of shaving 20 basis points off your charges, if the fund performance isn't up to the same level?

Times have changed
The world of pensions has moved on a lot in the last few years. Back then, personal pensions and stakeholders looked very similar, if not identical. SIPPs were specialist vehicles for investing in commercial property and the like.

Today, the lines defining personal pensions and SIPPs are blurred. Personal pensions and stakeholders no longer look anything like each other. Stakeholder cheap, personal pension expensive is no longer a truism. And, in some cases, SIPP is cheaper than both.

RU64 has long outlived its purpose and should go. What we need now is modern regulation, perhaps a more principles-based approach, to govern a modern market.

No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.