On the cusp of history

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It will not surprise you that changes in what are seen as fashionable product structures or propositions have heavily influenced the direction of regulation and political policy. Looking at historical developments only adds weight to this argument.

Back in the late 1990s many of us were sporting a fashionable pair of cargo pants as we lined up to buy the kids the must-have present of the time - a Furby. In the world of pensions, products that paid commission and then applied penalties on cessation of contributions or transfer had been the norm.

Things were changing though. New products that paid commission without these unpleasant penalties were coming to the fore. All was not straight forward though. Initial charges, establishment charges, policy fees, tiered annual charges and loyalty bonuses were all common features in the attempt to make the pounds and pennies stack up.

Some championed the ‘no exit’ or ‘premium cessation’ charges - even though 10 per cent of every premium (5 per cent bid offer spread and 95 per cent allocation to units) and a hefty monthly policy fee were deducted to pay for the privilege. I am not having a go; I am just telling it the way it was.

The year 2001 brought big changes. Leather jackets were back in and worn by those keen to impress, and technology was to the fore as we got our first introduction to the iPod. I bought one, I still have it. It is much more useful than a Furby. In terms of our industry, stakeholder pension schemes were introduced as a consequence of the Welfare Reform and Pensions Act 1999. As a quick memory jogger – the legislation outlined a 1 per cent a year cap on charges, low minimum contributions, and flexibility in relation to stopping and starting contributions. Personal pensions were still very much around, but to recommend one you had to satisfy the ‘at least as suitable as stakeholder’ test.

In the early days there were games. Some of the big life companies used their significant capital resources to continue to pay commission while holding true to the 1 per cent stakeholder charge cap. External fund links were also available so all, on the face of it, looked good. The Personal Pension crowd said it would never last; it did not. Many of these products were taking 15 or more years to generate positive cash flow. Somewhere, somehow the marketing guys persuaded the actuarial guys it was the smart thing to do. No doubt it was a central pillar in a land grab strategy that involved the life companies taking over the world. Time would see this one playing out with far more losers than winners.

All was not bad though - this change in the competitive landscape did lead to a change in the personal pension world with cleaner ‘mono charge’ products becoming normal.

As we headed through the noughties, the stakeholder camp was getting restless. No sooner had providers trumpeted these new structures than they were telling us they were not viable. Remember that bit about capital and 15 year cash flow problems? It was all hitting home. Lobbying brought change and in 2005 the 1 per cent maximum annual charge was increased to 1.5 per cent a year until the 10th year and 1 per cent thereafter.

We then entered a period of sensible, viable pricing which saw products priced to allow for provider margin, the cost of advice and the investment solution. From an investment perspective,external fund links continued growing in popularity. Alongside all of this the Sipp and the platform market started to really take off.

In more recent years the RDR changed the investment landscape with the rebate model going the same way as the Furby. New share classes, ETFs, ETCs and investment trusts all became more common as many advisers reviewed their own proposition and, for some, their approach to investment.

Now we look forward to a new world of pension freedoms, it seems that everybody and his brother wants a piece of this action.

As we look back over the last 20 years, what does history tell us? Well, from as far back as 2001 we have had a focus on charges. Through all these different periods it has been important to never lose sight of the fact that the overall impact of charges is a fairly important thing to grasp.

Competition and regulatory change have driven cost down. As we move towards the election, suggestions of a charge cap on drawdown smacks of a poor political counter punch. It is a classic case of approaching the solution to a problem by starting in the wrong place.The popular drawdown products of today have competitive charges and provide access to a wide range of investments, including many at low-cost. Pension freedoms will require some changes to the investment and income strategies adopted to support how and when people choose to benefit from their hard-earned cash. History tells us that, for many, a price cap will be all hindrance and no help to these people.

The starting point has to be addressing the more significant problem of people handcuffed to the products popular in the period up to the late 90s. A focus on cost is important, but for those caught in this timewarp their need for change is greater than the drawdown customers of today. As Confucius possibly never said: “If your Furby has fleas, washing your grandchild’s new Playstation 4 in medicated shampoo won’t solve the problem.You will just end up with a knackered games console”.

Billy Mackay is marketing director of AJ Bell