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NZ retirement planning, lessons from the UK
Paul King Consultant, speaker & trainer
What was supposed to happen?
• Aimed at £9k to £18.5k earners (up to average earnings at the time)
• Low cost, flexible, secure defined contribution • Compulsory minimum standards
– 1% – No hidden charges – Default investment fund – No transfer charges – Must accept transfers – Minimum payment £20 pm
Pre-Stakeholder
• ‘Stakeholder friendly’ schemes • Single AMC charging model • Providers need to manufacture plans that
would not make the adviser fall foul of RU64
What happened!
• April 2001, 50 Stakeholder schemes (circa 45 providers)
• ‘churning’ • Adviser commission now at 1/3rd previous levels
- ‘best advice’ doesn’t pay enough • Target market will not pay consultation fees • 80% of Stakeholders start as ‘empty
boxes’
Non-Stakeholder?
• Hybrids with options for higher charges for greater investment choice (1.3% - 1.4% AMC)
• Advisers justify higher charges as ‘cost of advice’
• By 2003, Government ‘re-defines’ the target market (above average earners is the new target)
Reality check
• Volumes, persistency, fund growth, contributions all fail to meet projections
• Growth of Fund Supermarkets & higher charged schemes sold (investment choice)
• Industry call for increase in 1% charge cap • Providers suggest dual charge (plan charge
separate from AMC)
Ivory (Faulty!) Towers
• Government sees that lower charges have produced changes
• Sandler review launched • Suite of ‘low cost’ non-pension savings products
recommended • AMC of 1.5% for first 10 years allowed on
Stakeholder • ‘New’ Stakeholder products launched April 2005
Best Advice?
• ‘Basic advice’ concept introduced to attract ‘lower paid’
• Cuts distribution costs by up to 3/4rs • HOWEVER, risk remains with the
provider • Providers and advisers shun basic advice
(too many retrospective ‘mis-selling’ scandals)
Poor deal
• Commission (on regular premium products) pays for advice
• Commission is an up-front cost to providers (whom look for a 12%-17% return on capital)
• Investors are therefore ‘borrowing’ money from providers for advice
• Funds may make 6%-8% • Why borrow at 15% to invest at 7%?
Summary
• Target market missed, Advisers not engaged
• Low up-take • Replacement proposed (not again!!!!) • Industry will not accept lower profits if it
can find a way not to • ? Government owned scheme?