Advisers may no longer have to consider stakeholder pensions

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Advisers may no longer have to consider stakeholder pensions

The Financial Conduct Authority (FCA) is currently seeking views on non-workplace pensions, including the stakeholder pension, which by law is capped at an annual management charge of 1.5 per cent per year for the first 10 years and 1 per cent thereafter.

The watchdog stated in a paper out on Friday (2 February), the charge caps may no longer be relevant, considering similar workplace pensions under auto-enrolment have been capped at a lower rate of 0.75 per cent.

It is also minded to tinker with a requirement on advisers to effectively benchmark their pension recommendations against the "advantageous" terms available under stakeholder pensions (the former RU64 rule).

The FCA stated: "For a period of time, consumers benefited from lower prices because of stakeholder pensions and the RU64 rule.

"We are concerned that this may no longer be the case as more competitive products may have emerged outside the stakeholder pension structure."

The FCA said it would collect data about stakeholder pension charges "to work out the extent to which the stakeholder pension charge cap now influences the charges on new and existing policies."

The regulator has no power to amend the cap contained within the stakeholder regulations, which can only be changed by the government, but it can consider whether the requirement on advisers to consider the products remains appropriate.

Steve Webb, a former pensions minister now director of policy at Royal London, said charge caps were outdated and needed scrutiny, particularly as new forms of technology were likely to have brought down the cost of providing pension products.

He said: "The FCA should be looking at whether the cost of providing stakeholder pensions has come down in the last 15 years significant enough to have another look at them."

He also called for a review of the requirement on advisers saying there was a danger that it becomes a tick box exercise.

Sir Steve said: "I can imagine they might drop that as a requirement."

Steven Cameron, pensions director at Aegon, questioned the relevance of the stakeholders products altogether.

He pointed to the government's latest auto-enrolment review, in which it said it was thinking to introduce equivalent options for the self-employed.

He said: "For the self-employed stakeholder pensions might lose their relevance and they have also got the Lifetime Isa, which may be more useful to them.

"I am not sure reviewing the value for money for stakeholder pensions would be at the top of my priorities right now."

He questioned whether the products should be pulled from the market altogether but agreed at the very least the 1.5 per cent charge cap should go.

Mr Cameron said: "The 1.5 per cent cap was to allow for advisers to advise and receive commission out of that.

"We don't have commission anymore so from that perspective the justification for the 1.5 per cent cap has been taken away."

Stakeholder pensions, introduced in 2001, were designed to appeal to consumers who previously considered pensions difficult to understand, expensive and inconvenient to buy.

But sales of the products dropped in recent years, perhaps partly due to the government's pension freedom reforms and the emergence of cheaper forms of streamlined personal pensions.

Despite this the FCA pointed to research from 2016 stating there were more than 14 million individual and stakeholder pensions in the market - with an average policy value of £22,000 - while about 1.7 million Sipps were in force.

Mr Cameron suggested many of those could be legacy products. 

Fiona Tait, technical director at Intelligent Pensions, spoke in a similar vein.

She said: "The FCA said they have concerns whether stakeholder pensions is still relevant.

"The rule, where you have to consider stakeholder pensions doesn't seem to be particularly relevant now.

"We now have a Sipp market developing in two areas, bespoke and streamlined. They will find stakeholder pensions reducing and Sipp sales increasing."

But Vince Smith-Hughes, a retirement income expert at Prudential, said there was scope to modernise the products.

He said: "I would review stakeholder pensions because the markets have moved on [but] some may still be suitable. They are still reasonably priced.

"They could remove the restrictions so they could be opened up to other investments. That might be a way of stopping customers transferring their assets [out of the products]."

carmen.reichman@ft.com