Pensions shake-up sets tough limits on providers

News Analysis: The `stakeholder' plan includes a cap on the fees companies can charge
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The Independent Online
AT FIRST glance, Labour's long-awaited proposals for pensions reform, unveiled yesterday, look like a dream come true for Britain's pension providers.

If the suggestions contained in the pensions Green Paper become law, the 5 million people in Britain who at present have neither a personal pension nor access to an occupational scheme will be encouraged - via tax breaks - to take out new "stakeholder" pensions to be provided by the private sector.

The Government will, in effect, be introducing millions of new customers to banks, insurance companies and other providers. But there is no such thing as a free lunch, and yesterday's Green Paper contains several proposals designed to limit the profits that pension providers can make from the new stakeholder pensions.

First, Alistair Darling, the Social Security Secretary, plans to cap fees for the new pension at between 0.5 per cent and 1 per cent - the current industry average is around 1.5 per cent. Perhaps surprisingly, this decision was broadly welcomed by the pensions industry, where many believe the proposed charging structure will help stimulate demand.

Rowan Gormley, chief executive of Virgin Direct, says: "People will start saving when they understand how pensions work and realise that they can no longer be ripped off."

Stephen Ingledew, head of group marketing at the pension company NPI, which has been heavily involved in advising the Government on the pension review, adds: "The simplicity, flexibility and low costs of the new stakeholder pension, plus the built-in incentives, will make saving for retirement very popular among the public."

But the fee cap means that pension companies - particularly the longer- established ones, which typically have higher cost bases - will have to improve efficiency to make money. "The Government wants a simple product with very low charges," says Adrian Boulding, pensions strategy director at Legal & General. "It's down to us to operate and administer it in an efficient way".

Some of the proposals in the Green Paper go some way to helping pension providers get their costs down. The decision to scrap the State Earnings Related Pension Scheme (Serps), with its heavy administrative burden, will reduce operating cost. Not surprisingly, this was warmly welcomed by most in the industry.

"I am pleased and surprised that the Government has bitten the bullet and decided to change Serps," says Jerry Barnfield, head of pensions strategy at CGU, the insurers.

The proposed collective structure of stakeholder pensions will help on the cost front. The idea is that potential customers do not approach pension companies on an individual basis, but instead go via their employer - who will be obliged to offer stakeholder pensions if no occupational scheme is on offer - or another collective body. This helps keep costs down because pension providers can exploit economies of scale. It saves on advertising costs, for example.

Again, this part of the government paper was welcomed by the providers, although employers - who will face an increased administrative burden - were less keen. The Government has made it clear, however, that it expects cost savings of this type to be passed on to customers.

Competition to provide the new pensions will also hurt margins. "Demand will be high from customers, but competition will be intense," says Mr Boulding. The market is already full to bursting with companies selling pensions, and over the past few years many non-traditional players have moved into pensions. The scramble to provide the best possible deal, combined with the improved transparency of the new scheme, will mean that high- cost providers lose out - good news for customers, but bad for the bottom line.

Then there is the problem of "cannibalisation" of existing savings vehicles. When the Government launched its pensions review a year ago, one of the industry's greatest concerns was that stakeholder pensions might be more attractive than existing pension arrangements, prompting extensive switching from personal or occupational schemes.

There was wide relief that yesterday's proposals did not harm company pension schemes: indeed, the Government emphasised that occupational schemes were the right answer for many people. However, the introduction of the stakeholder pensions could reduce demand for non-pension savings vehicles - Tessas, PEPs, and so forth - and this could damage profitability.

"Stakeholder pensions will be the savings vehicle for many people going forward," says Mr Tompkins of PwC. "Tessas and PEPs were the vehicle of the late 1980s and early 1990s."

The new pension plans do represent a great opportunity for the pension companies, so it is hardly surprising that the plans were well-received by the industry. They give the companies access to millions of new customers - not only for stakeholder pensions but also, potentially, for a wide range of other financial products.

To make the most of this, though, the companies will have to work hard on their cost base and maintaining demand for existing savings vehicles. Only the most efficient and most imaginative will prosper in the brave new pension world.


Name Turnover (pounds ) Pre-tax (pounds ) EPS Dividend Pay day X-div

Batleys (I) 259.77m (266.18m) 3.54m (5.10m) - (-) -(-) - -

Boustead (I) 7.373m(0.865m) -0.100m(0.193m) -0.2p(0.1p) -(-) - -

Computerland (I) 19.4m(10.303m) 0.507m(0.398m) 3.8p(5.7p) 0.80p(0.65p) 01.03.99 21.12.98

First Choice Holidays (F) 1.244b(1.021b) 50.0m(15.4m) 13.0p(3.7p) 2.2p(1.9p) 06.04.99 22.02.99

Freepages Group (F) 18.59m(15.36m) -26.56m(-14.97m) -5.40p(-3.38p) -(- ) - -

Halma (I) 106.341m(103.283m) 19.033m(18.748m) 3.65p(3.56p) 1.31p(1.09p) 15.02.99 11.01.99

Hawtin(F) 48.666m(46.295m) 4.004m(2.053m) 3.9p(1.96p) 1.32p(-) 06.04.99 01.03.99

Leeds Group (F) 73.553m(75.039m) 5.652m(8.745m) 10.2p(15.9p) 7.0p(7.0p) 27.01.99 21.12.98

MFI furniture Group (I) 450.3m(475.5m) 8.8m(35.4m) -4.02p(4.24p) 0.7p(1.8p) 05.02.99 29.12.98

Mondas(I) 0.224m(0.143m) -0.208m(-0.251m) 4.1p(3.4p) -(-) - -

NFC (F) 2.313b(2.241b) 134.4m(87.8m) 10.8p(10.0p) 3.0p(-) 01.03.99 21.12.98

Securicor Group (F) 1.195b(1.354b) 83.5m(31.4m) 9.8p(2.7p) 1.93p(1.74p) 05.04.99 01.03.99

Tom Hoskins (I) 2.125m(1.541m) 0.080m(0.101m) 0.78p(1.32p) -(-) - -

Utilitec (I) 23.537m(23.816m) 1.594m(2.338m) 1.6p(2.9p) 0.45p(0.40p) 07.05.99 21.12.98

(F) - Final (I) - Interim (Q) - Quarterly (SP) - Split Period (N) - Nine Months