Making the case for commission

You then set up a series of funds to deliver those objectives. Instead of linking it to an individual’s birthday, it would be calendar-year based. There is nothing magical about a birthday. So you would have two funds for each of the years 2025, 2026, 2027 and so on; one providing a lump sum and the other income. They would vest on a prescribed date, maybe 1 Jan or 1 July or 31 December. The income fund would require some thought. It would still be priced as if it was a lump sum fund but could only be cashed as income – which might be an annuity, guaranteed or variable, or income drawdown. The asset mix would aim to reduce volatility as the maturity date approached and would have regard to the risk-preference chosen.

For want of a better description, they would be with profits funds run on a mutual basis. There would be a fixed charge, which is all the provider would receive as revenue and out of which commission would be paid. There would in addition be a ‘guarantee reserve’, the purpose of which would be to ensure stability of price. It would be run down by the maturity date.

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That should have been the basis of stakeholder pensions when they were originally launched at the turn of the century – if only the product providers had had the imagination.

The key to successful financial planning is discipline. In the past quarter of a century consumer champions have insisted on flexibility and choice. The product providers have delivered. But at what price? They have struggled to provide the systems that deliver what they have been asked to provide. All the recent talk about administration errors have been as a result of this. It is all very well for consumer champions to bleat, but who created the chaos in the first place?

Unlimited flexibility and choice is a recipe for inaction. What is needed is a simple set of products addressing genuine needs. With profits still has a role to play– if it stuck to its original purpose. Providers have tweaked and twisted it, particularly in the pensions version, to be all singing, all dancing – but it has ended up being a camel.

Icki Iqbal is a former director of Deloitte