UK – The introduction of stakeholder pension schemes in the UK is having a direct influence on additional voluntary contribution schemes (AVCs), according to the latest AVCs survey undertaken by UK based consultancy firm, Watson Wyatt.

The report finds the cost of topping up company pension plans has been “drastically reduced in the past year”.

Basically, the lower charges incurred by stakeholder schemes are forcing AVCs to cut theirs in order to remain competitive. Some AVCs have reportedly reduced their charges by as much as half. But the situation is not expected to get any worse.

“We expect the situation to straighten itself out once the charges for AVCs have fallen to the same level as those for stakeholder pensions. They are unlikely to fall beyond that, ” comments Bruce Wraight at Watson Wyatt.

The AVCs market has been dealt a further blow by falling returns, the survey suggests.
“Many have focused on the reduced charges issue, but while lower charges are to be welcomed, it is important to recognise the more substantial effect of investment performance,” says Andy Parker, Watson Wyatt senior consultant.

According to the survey, AVCs have fared badly during a time of difficult investment conditions, with Unit-linked AVCs coming off worst. Typically, a £100 per month contribution into a managed fund over five years to March 2000 produced a yearly return of 12%. The same contribution to March 2001, however, saw the yearly return fall to just 7%.

“The last 12 months have seen rapid change in the provision of AVC facilities. Trustees should seek to ensure they keep abreast of developments and continue to offer cost effective, comprehensive AVC arrangements,” Parker suggests.