At the government’s insistence, companies have spent the past year or so extending pension arrangements to all their employees through stakeholder schemes. This was supposed to encourage lower-paid employees, and those who were not eligible for occupational schemes, to get into long-term saving for their retirement.
It was a grand idea, in a way, but it has turned into a lead brick. Stakeholder has not flown. In fact, the consensus is that the idea has bombed, possibly irretrievably. Figures released by the Association of British Insurers show that just over 90% of all schemes set up as stakeholder funds have no members.
The question now for finance directors is what to do next. Should they ignore the fact that an attempt to extend pension arrangements to the rest of their workforce has failed? They can turn away if they and their board choose, but turning one’s back on the lower-paid sector of the workforce is hardly going to win your company an ’employer of choice’ award.
Pensions experts are unanimous in their belief that the government will not be able to fund future generations of pensioners out of tax revenues to any reasonable standard. It follows then that companies which refuse to help tranches of their workforce (usually those who are least able to save for themselves) are, in effect, committing the staff involved to a penurious old age.
FDs could, of course, opt to do some kind of pound-for-pound matching for employees who contribute to stakeholder, and there is nothing wrong with that as an idea, as long as it can be squared with the need to maximise value for shareholders. However, there is another government-inspired initiative percolating through the pensions sector in the shape of the Sandler Review, which FDs will probably rather fall back on.
Ron Sandler (pictured), former chief executive of Lloyd’s of London and current chairman of Computacenter, has completed his review and his findings are now being digested by the government and the Financial Services Authority. It is important to point out that Sandler’s brief specifically excluded occupational pensions. His mission was to look at the personal savings market, including life and pensions products.
As such, his focus is on what individuals can do for themselves and what needs to be done to create a more beneficial personal savings regime.
By looking to Sandler’s proposed solutions to stimulate personal savings, FDs will be better able to form a view as to whether staff not already included in their occupational schemes can reasonably be left to their own devices.
As Sandler told Financial Director, his investigation into the savings industry convinced him that the solution lies with deregulating advice and regulating products instead. “Present requirements on independent financial advisors to ‘know the client’ and ‘provide best advice’ requires work and skill, and this makes the process expensive. As such, it disenfranchises lower earners from much of the savings market. To overcome this, you need to re-engineer the economics of how you provide products to savers, and you do this by regulating the product,” he says.
The point is that if there are simple, relatively low-risk, low-return savings vehicles that can be regulated by the FSA, and you deregulate the advice side, you can use the workplace as an effective way to distribute such products.
“The structure of the savings market, as it exists at the moment, favours the creation of complexity. Complex products and expensive advice works against lower earners investing for their futures. If you have simple, regulated products and make advice free because it is not regulated, then misselling does not arise. Simplifying products in and of itself will not make people invest more, but if you couple this with the freedom to market such products by removing the regulatory barriers, then you will get more savings,” Sandler argues.
It is the combination of the freedom to market, plus product simplification, that he sees as having the best chance of stimulating savings. People will not save more simply because products are made simple. They will, however, respond to active campaigns to buy regulated products. The history of advertising tells us this much, at least.
He admits that given the focus of his brief, he has not hitherto spent much time thinking about how a regime based on his products would fit alongside the occupational pension regime. But he told Financial Director that the key would probably lie in the emphasis on workplace distribution.
If FDs put their weight behind product provider initiatives to sell into their employee base, which they could do if the restrictions on best advice were lifted for such products, this could have quite an impact.
So where do things stand right now? According to Sandler, the government is at work trying to define what a low-risk, low-return, simplified savings product would look like, and the FSA is working to define a regulatory regime for such a product. He anticipates a result by 2004.
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