WITH THE annual PEP season drawing to its normal, frantic last- minute rush, it seems a good moment to stop and make some observations about the whole phenomenon.
It is fair to say, I think, that nobody at the time the first PEP was launched in 1986 could have foreseen quite how successful the phenomenon would prove to be.
As Nigel Lawson makes clear in his memoirs, his motive in introducing PEPs as Chancellor was to encourage direct investment by individuals in UK company shares. He was not sure whether they would help to boost the country's savings rate, or merely move money from one home (such as National Savings) to another.
As it happens, PEPs have done little to promote direct investment in equities: single-company and self-managed PEPs remain but a small part of the overall PEPs market. Instead, after a shaky start, what PEPs have proved to be is a means by which the unit trust business has succeeded in reinventing itself, beyond its wildest possible dreams.
Most of the huge flow of funds which have poured into PEPs in recent years has gone into unit trusts. Investment trusts have also benefited, but to a lesser extent. Other beneficiaries of the PEP business include IFAs (many of whom have grown fat on the back of PEP commissions) and the financial press, which has enjoyed the fruits of the heavy advertising which now routinely accompanies the end of the PEPs season.
So it is fair to say that PEPs have been a powerful factor in changing the landscape of the personal financial business, but not quite in the way that was originally intended.
As the PEP business has coincided with one of the greatest bull markets of all time on the stock market, it is impossible to deny that the net impact on many ordinary investors has been both positive and enduring. What it demonstrates also is that when it comes to savings most people rightly like to keep things simple. They like the tax benefits of PEPs, of course: but what their behaviour over the last 13 years shows also, I suspect, is that they also like two other things.
One is a freedom from hassle. One reason why most people prefer to hold shares through the expensive medium of a unit trust rather than some more cost- effective alternative is that they simply cannot be bothered with all the hassle of owning shares directly.
They are happy to pay over the odds for the privilege of having most of the hard work done for them. (This may also explain the fact that so many prefer to wait until the very last minute before doing anything about their annual tax-free allowance.)
The second thing is that most people still prefer to be sold something rather than buy it themselves. Most people still don't fully realise quite how expensive unit trusts are.
Even since the introduction of key features documents, with their accompanying reduction in yield tables, it is remarkable how resilient sales of some of the most expensive unit trusts have been.
There is also a clear correlation between recent performance and sales figures, as those with off periods in recent performance (such as M&G and apparently more recently Schroders and Perpetual) can testify to their cost.
Given that past performance is such an unreliable guide to future performance, it is clear that what many people are signalling is that they are simply not confident enough to make their own decisions.
They are happy to be guided by IFAs in their choice of PEPs, despite the evident distortions introduced by the commission system, and happy also to take on trust the implied claims (all based on past performance) which they read about in the advertising. I don't think anyone could foresee the emergence of brands of this kind when the PEPbusiness started. At a deeper level, what this behaviour points to is a continuing lack of education in the basics of money and financial planning.
This is what lies behind the Government's noble intentions in trying to promote wider understanding of financial issues. It is also trying to help savers help themselves with its Cost Access and Terms (CAT) standards for the new ISAswhich will replace PEPs next year and with its proposals for cheap stakeholder pensions. Nobody can take issue with its diagnosis of the problem nor, I am sure, with the sincerity of its objectives.
The history of PEPs is a salutary warning, however, that things rarely go according to plan when governments start trying to muck around with the way that the market works. This Government has not got off to the best of starts: its proposals for ISAs are not very well thought out.
They are too complicated and open to an obvious criticism, which is: "Why muck around with the PEPformula when it has clearly been shown to be what the market wants?" The cynical answer, which is that every new government prefers to have its own, better mousetrap, is probably painfully near the mark.
What we have to wait to see now is whether the industry is prepared to pick up the ISA ball and run with it. By insisting on low charges for its CAT standard, the Government is posing a direct threat to the profitability of the business.
It will be interesting to see how many firms are confident enough in their brands to bypass the CATstandard - and how many of their customers will go with them in that case.
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