FT Personal View on problems of savings products for mass market
by Dr. Ros Altmann
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The Government’s flagship policy initiatives for encouraging savings may be on the brink of sinking. Since 1997, the Government has been trying to encourage everyone to save and build up assets. We have had a succession of reviews, consultations and policy initiatives designed to address the needs of ‘mass market’ savers. Sadly, these policies have not worked. If anything, the propensity to save has fallen, rather than risen, particularly for pensions. I fear the situation is about to become even worse.
Savings policy has been driven by a ‘supply-side’ agenda of offering cheaper, simpler products, with tougher regulation. The stakeholder pensions initiative, initially targeting those earning £10,000-£20,000 a year, introduced a 1% charge cap, plus requirements to permit penalty-free transfers, interrupted contributions and low minimum contributions down to £20 a month. After years of rip-off charging structures and hidden penalty clauses, such requirements sounded like a welcome breath of fresh air. Providers’ cost structures were too high and the Treasury wanted to encourage them to become more efficient.
However, the pressures imposed on the industry may have been too draconian. At the same time as the Government introduced a set of regulations on products which forced costs down, it also imposed a set of regulations on the sales process and advice, which forced costs up. With disclosure regulations, money laundering forms, FSA compliance requirements and reams of documentation, the savings market is tied up in red tape and jargon. It is currently easier for most people to take out a £20,000 loan, with repayments that cannot be afforded, than to put £20 a month into a stakeholder pension. No wonder the savings ratio has fallen!
The fact is that, in the current environment, the majority of the population is unprofitable for advisers and providers to serve. The Sandler Review’s excellent analysis highlighted that most people have effectively been locked out of the independent advice process, but the recommended solution was to offer simple, cheap products which would be ‘safe’ to buy without advice. For example, the Sandler ‘equity’ product is supposed to be ‘safe’ because it limits maximum equity exposure to 60%. This may not be appropriate for uninitiated investors, since they could still suffer serious losses in a bear market, but no adviser will be paid to explain this to them.
The new Sandler stakeholder products, to be introduced shortly, cannot levy up-front charges, and annual charges must be capped at 1.5% for the first 10 years. However, almost all the costs of selling a product are incurred up-front. If the purchaser does not pay these costs, providers will suffer losses. The industry has tried to persuade the Government that they cannot make money in the current regime, even at 1.5%, but the Government has not listened, so providers are now saying ‘enough is enough’ and refusing to sell stakeholder products on which they will lose money.
For too long, they have been pretending that something which is deeply unprofitable, is acceptable. The break-even period for stakeholder products is probably over 10 years and providers cannot be sure that lower value business will stick for that long, so why should they engage?
Large providers have recently announced they will stop paying commission on stakeholder pensions with contributions below £100 per month, which of course ensures no incentives for advisers. They are further restricting the choice of investment options too. Even more worrying, the industry is also refusing to take on smaller group pension schemes, because it is uneconomic to do business with companies employing less than 50 or 100 people, especially where pay levels are low. Already, most stakeholder schemes are empty shells, because employers do not see value in providing pensions and this will only become worse as providers and advisers pull back from the SME sector.
The new regime of depolarisation will not help here either, since low income consumers are likely to be confused about the different levels of tied, multi-tied and independent advice and advisers will not be remunerated for serving them anyway. This means there is a huge risk of mis-buying, which could be worse than mis-selling, since there is no-one to pay compensation if the wrong product is bought. Given that most people find it hard, if not impossible, to understand financial matters and desperately need financial planning advice, the environment is actually worsening.
As the economic realities of the marketplace are reflected in product design, those with modest amounts to save are being disadvantaged. The financial services industry will service only higher earners, leaving around 80% of the population to fend for themselves, without independent advice, in an environment where the products are not necessarily suitable for them. Pension credit, in particular, makes pensions unsuitable investments for millions of people, yet no-one will tell them. How can savings policy move forward?
I would suggest that a possible solution could be to let National Savings design and run the suite of Sandler stakeholder products for the mass market. National Savings products much more readily fit most small investors’ concept of ‘risk’, which is simply ‘will I lose money?’ They carry a money-back guarantee from the Treasury, offer stock-market funds, bond funds, index-linked products and cash accounts, have no charges and are truly ‘safe’, low risk investments for small investors. The financial services industry would then get on with servicing wealthier investors, who, in the real world, are probably the only ones they can actually afford to serve.