An Analysis of the UK Stakeholder Pension Initiative

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An Analysis of the UK StakeholderPension
Initiative

• Trevor Matthews
• CEO, UK Life Pensions
• Standard Life

41st Annual Seminar International Insurance
Society Hong Kong 13 July 2005
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Outline

• Perceived Problem
• Suggested Solution
• Contagion Effect
• Life Company Reaction
• Results
• Way Ahead

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Perceived Problem

• UK had one of worlds most highly regarded
  pension systems in 1980s
• Three pillars
• Valuable tax incentives
• But inadequate coverage

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Suggested Solution

• Compulsory for all employers with more than 5
  employees to offer low-cost stakeholder plan
• 1 p.a. price cap (single charge)
• No other charges up front, on exit, on members,
  on transfer
• Naïve assumption if cheap enough people will
  buy

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Contagion Effect

• Other products brought into line
• Stakeholder friendly pensions
• Single rather than multiple charges

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Life Company Reaction

• Reduced initial commission from 75 first years
  premium to 25
• Some life companies also reduced charges on
  in-force book to avoid risk of re-broking

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Life Company Reaction
Profit profile Individual Personal Pension
First year allocation rate 70 and initial
commission 30.(200 per month, 20 year term)
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Life Company Reaction
Profit profile-Single charge Stakeholder pension
Initial commission 23 of premium. (200 per
month, 20 year term)
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Results

• Very disappointing take-up
• 35 of organisations provide access
• (80 for those with 13-49 staff)
• 42 have no members (empty boxes)
• 52 have less than 25 of workers enrolled
• Median contribution only 3-5 salaries

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Results
New Regular Premium Individual Pensions by
Product
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Source PPI (2003)
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Results
Single Premium Individual Pensions by Product
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 Source PPI (2003)
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Results

• Damaged financial position of life offices
• Effectively prevented distributors from charging
  fees
• Stakeholder offered value to employers, too good
  to be true
• Life companies cut initial commission to 8 end
  2004

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Way Ahead

• Aussie comparison
• Compulsory super contribution of 9 of salaries
• 88 workforce covered
• Charges of A1 per week plus wholesale investment
  management fee gt 1.2 p.a.
• Advisors focus on changing jobs and retirement
  real value added

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Way Ahead

• Turner Commission recommendations due late 2005
• More wrap type products where interests of
  client, adviser and provider are more naturally
  aligned

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