Stay up to date with notifications from The Independent

Notifications can be managed in browser preferences.

Everything you ever wanted to know about the savings industry but were afraid to ask

William Kay,Personal Finance Editor
Wednesday 10 July 2002 00:00 BST
Comments

What is this report all about?

In June last year the Government commissioned Ron Sandler, a former chief executive of the Lloyd's of London insurance market, to review the long-term savings industry – pensions, with-profits policies and other investments such as unit trusts and investment trusts. They asked him to "identify the competitive forces and incentives that drive the industries concerned, in particular in relation to their approaches to investment, and, where necessary, to suggest policy responses to ensure that consumers are well served".

And has he done that?

Up to a point. The Sandler report has plenty of suggested policy responses for the Government to chew on, designed to get as close as possible to his ideal of a well-functioning savings market in which consumers have ready access to products and a "reasonable" understanding of them.

Will I have to scrap my existing investments?

No. Mr Sandler wants to make saving simpler, especially for the poorer and less educated. So he would like to see a new range of products, separate from what exists already, and for which he has pinched the label "stakeholder" from the government's existing pension scheme. This new three-piece "suite", as the report terms it, would include a mutual fund or a unit-linked life fund, a with-profits bond or policy, and thirdly it would absorb the existing stakeholder pension with some extra safeguards. These products would be simple and safe enough for anyone to invest in, without knowing too much about how they operate.

Never mind having to scrap what I've got, will it pay me to do so?

A much trickier question. It depends how good and/or keen an investor you are. The Sandler products are aimed at the novice and will be designed to let their investors sleep at night, presumably even when the market is crashing as it has been lately. But the price of that is almost certainly that they will also be fairly unexciting and you will miss the best of any upturn. But Mr Sandler warns: "The protection afforded by product regulation has limits. There are consumers whose specific circumstances are such that they need specific and tailored advice. For them, even heavily regulated products could be unsuitable."

OK, I don't like risk and I don't think I need tailored advice: how will I go about getting hold of one of these new Sandlerised products?

With a visit from a salesperson – but they will have to stick to a strict script. They will have to give you several "plain English" warnings. You will then have to certify that you had received and understood each of these, including that you were being offered the opportunity to buy a restricted number of simple products, and that the seller could not provide expert advice on your other investments. You should also be told that the products being sold have an element of financial markets risk, and that you should therefore think carefully before putting too much money in them. The seller will point out that these products are not appropriate for meeting specific future liabilities, as their future value cannot be guaranteed, and you should not buy them if you wanted to stay in for less than five years. Altogether, a fairly negative conversation that might put you off the idea.

Still, as long as we get a decent slice of tax relief, the new stakeholder products won't be too bad, will they?

Unfortunately, with the exception of individual savings accounts (ISAs), Mr Sandler is not too keen on tax incentives. To keep things simple, the review recommends that governments should avoid introducing new tax-based savings incentives if their aim is to increase aggregate savings levels.

Mr Sandler seems to think that "active" fund management is bad and "passive" fund management is good: what's that all about?

Active fund managers buy and sell stocks and shares on the basis of their own judgement, while passive fund managers try to mirror the behaviour of a particular stock market index, such as the FTSE 100. Mr Sandler says: "Consumers have a preference for active management that seems hard to justify. Retail investors are incurring the additional costs of active management when there is little chance of their achieving higher returns to compensate for this." That effectively dismisses an army of fund managers, some very successful and some not. But he also says stakeholder products should be actively managed, so he does see a role for that approach.

What about Alan Pickering – hasn't he got a report coming out that will go over the same ground again?

Not quite. On Thursday Mr Pickering, former head of the National Association of Pension Funds, will say how he thinks pensions should be reformed. He is expected to recommend cutting the costs of running final salary schemes, but his main call will be to make all employees join their company's occupational pension plan. Watch out, too, for suggestions that the retirement age should rise, possibly to 70.

Join our commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in