UK - Towers Perrin’s Tillinghast actuarial and management consulting business, has criticised the UK government’s plans for cheap and simple investment products as “stupid”.
The UK is developing plans for a range of investment products with capped charges of 1.5% for the first 10 years to complement the existing stakeholder pension launched in 2001. The proposal is for the medium-term investment product would allow up to 60% to be invested in equities but as people neared retirement the proportion of bonds from equities would increase still further.
Bruce Moss, a principal at Tillinghast, said government attempts to mandate how much equities the so-called medium-term stakeholder products could hold and when assets should be shifted to bonds would cost investors money, limit take-up by investors and was “stupid”.
He told IPE: “In the long-term equities outperform bonds by about 2.5% a year, according to our stochastic model. So by capping the proportion of equities in a fund at 60% means investors will miss out on around 1% a year in performance. It will, therefore, be easier for financial advisers to tell clients the stakeholder products are not good news. By restricting choice it makes the product less attractive.
“And moving people further into bonds as they near retirement is not particularly good practice as people say they will retire earlier than they do. Forcing people_to move into bonds [on their plans and out of_equities] would be too early and stupid. Plus, in 2006 the Pensions Act will allow greater flexibility after retirement in drawdown so they could switch from equities to bonds then, if they want. The problem with mandatory requirements is that people will lose part of their returns.”
It is also unclear who will actually sell the stakeholder products other than the banks, Tillinghast said. It added that it had severe doubts the changes proposed would result in banks becoming major players in the market. “The charge may be still too little to encourage most banks to engage in much more than passive promotion of stakeholder products to the mass market. This is because there is little motive for them to divert resources from the higher profit margin traditional banking products that they already offer,” the consultants said.
For this reason - and the continuing need of most consumers for 'high-touch' face to face advice - Tillinghast said the stakeholder regime would fail to significantly bridging the savings gap, which was last estimated at £27bn by the Association of British Insurers.