Legal & General steps up PEP war
Wednesday 01 November 1995
The insurance giant Legal & General stepped up the war in the financial services market last night by announcing that it is to abolish initial charges on all its personal equity plans.
In moves designed to turn it from a minor league player into one of the top 10, it will also be launching a new corporate bond PEP and a new PEP that will track the FT-SE stock market index.
The new strategy is a direct challenge to Richard Branson's claims to provide low-cost PEPs for the masses. There are no immediate plans to cut charges on its unit trusts as well, but they could follow.
Legal & General is number 20 in the current league, with just pounds 350m of PEPs under management. It aimes to become one of the top 10 providers, with between 5 per cent and 10 per cent of an estimated pounds 25bn market within three years.
Investors in L&G's five existing PEPs will no longer be asked to pay a 3 per cent initial charge to buy a plan. Annual management charges will remain at 1.25 per cent on the growth plan and 1.5 per cent on the other four. A fee will be introduced on withdrawals, however, within the first five years.
The 3 per cent initial charge will be abolished on the existing guaranteed PEP and the highly successful guaranteed corporate bond PEP, which it claims has attracted half of all the money invested in corporate bond PEPs to date, although investors will still pay a 4 per cent charge for the guarantee against loss if the stock market falls, plus a 2 per cent annual charge.
A new corporate bond PEP will be offered, investing in L&G's fixed-interest trust, offering a running yield of 8.2 per cent tax-free after management expenses, and a redemption yield of 7.7 per cent. The 1.25 per cent annual management charge will be deducted from the income, and there will be withdrawal fees but there will be no initial charge.
An index-tracking PEP is being launched in direct competition with Richard Branson's Virgin tracker fund. Its value will rise and fall with the FT- SE all-share index.
There will be no initial charge, no withdrawal fee and annual management charges of just 0.5 per cent plus a flat fee of pounds 25 plus VAT a year. That works out at pounds 89.38 a year on an investment of pounds 12,000 and pounds 179.38 on a maximum holding of pounds 30,000 built up over five years.
It compares with charges of pounds 120 and pounds 300 respectively on a standard 1 per cent fee charged by the cheapest alternative providers, rising to pounds 180 and pounds 450 on some of the highest-cost rival PEP providers.
L&G will sell its products through all available channels, through its direct sales force, its tied agents and through independent financial advisers and off the page in newspapers and magazines. It will continue to pay a commission of 1.5 per cent.
Faced with this concerted attack many smaller competitors will simply be unable to compete and will be unable to advertise their PEP products, Michael Hayden, L&G's managing director, retail products, said yesterday.
Legal & General is targeting the estimated 1 million individual investors who hold PEPs issued by a variety of providers and convincing them that they can transfer their existing plans to Legal & General to take advantage of low charges.
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