Project summaries
The papers in this pamphlet discuss alternative approaches to signalling the value for money of stakeholder and other pensions. They may disagree about the precise solutions, but their diagnoses are similar.
First, they basically agree about the problem. The complex presentation of traditional financial services to consumers will not work in the mass market of stakeholder pensions: they will not allow (often unsophisticated) consumers to choose pensions with any assurance that they are reputable and cost-effective, and the current regulatory framework will be too expensive to administer given the small scale of the typical investment. In other words, the worst of all worlds: ineffective and costly.
Second, they all argue that there should be an increasing focus on the regulation of products, rather than just on the sales process and company accreditation. Such product regulation, whilst a seeming technicality, would actually be a radical shift of regulatory philosophy, designed specifically for small investments by consumers typically not well versed in financial planning.
Third, they all basically agree about the need to simplify the presentation of financial performance, such that it can be characterised by a limited number of statistics presented in a common form between competing products, rather than as a complicated story which cannot easily be compared from one offering to another.
Finally, they all agree that a key feature of pension value for money is the level of charges levied, which can have a major impact on the amounts of money received. Anyone doubting this should turn to John Chapman’s paper, which demonstrates the wide variations in charges between current financial services and the effects of these differences on the yields available to the consumer.
In their various papers, all the authors argue for a standard benchmark presentation of product value for money, based upon reduction in yield and (perhaps) investment performance. As Garry Heath argues, "the inclusion of a factor based upon reduction in yield (RIY), or a combined RIY/investment performance figure, would give the client an idea of relative value particularly if accompanied by an industry average for that product." This approach is analogous to the mandatory use of APR figures for loans.
In his paper, John Chapman takes the argument one step further in his development of a more sophisticated ABC rating system which draws a distinction between reduction of yield in the short, medium and longer terms respectively. He also proposes the publication of ‘league tables’ which rank different firms’ products according to the rating system, and provides tables ranking current firms’ products. His paper includes such 1997 league tables for a variety of company’s products.
The term ‘benchmarking’ is used to describe the approach above.
Philip Telford also argues for a benchmarking approach, along the lines of he Which? Best Buys, and his paper includes the results of Consumer Association research about the problems that need to be addressed from the consumers’ perspective.
Adrian Boulding agrees that comparative charges are important and proposes that the maximum charges permitted should initially be set at 1.5% pa. But he also argues that other factors need to be taken into account when choosing a stakeholder pension, particularly relating to security and flexibility. His paper provides a comprehensive checklist of such factors, ranging from "automatic procedures to ‘lock in’ accumulated gains as retirement nears" to "transfer to another scheme allowed at any time".
Importantly, he then goes on to argue that the Government should use such a checklist to accredit particular stakeholder pension products as meeting a defined set of criteria. The term ‘Quality Assurance’ is used to describe such an the approach.
Collectively, the papers put forward a convincing case that ‘something must be done’ if the stakeholder pensions initiative is to be successful, and that the focus should be on the publication of reliable, comparative and easily available information to the consumer.
But it is very difficult for any independent third party to provide such information; in contrast with (for example) Standard and Poor’s debt ratings, there is no long track record and no easy way of reaching the mass audience required.
Our conclusion is simple: the Government and its regulators need to take on a leadership role, making sure that consumers have a reasonable basis for comparing pensions. The papers in this pamphlet provide a variety of ideas upon which the Government could usefully draw.
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