Charge caps for new stakeholder products

The consultation on "stakeholder" saving and investment products regulations

The Government today announced the charge caps which will apply to the cash, medium term and pension stakeholder products:

Cash deposit account: the rate of interest payable must be within 1 per cent of the Bank of England Base Rate. This is a reduction from the current 2 per cent margin allowed in cash ISAs.

Medium term investment product and pension product: there will be an annual management charge capped at 1.5 per cent for the first 10 years that the product is held, and 1 per cent thereafter.

The new caps will take effect when the products are introduced in April 2005.

Announcing the decision, Financial Secretary Ruth Kelly, said:

“The Government has always maintained that the price cap for stakeholder products should strike a balance between the interests of consumers and the economics of the stakeholder market. To help inform our decision we commissioned research by Deloitte on the market impact of a range of price caps and consulted widely with industry and consumer groups.

“The 1.5% cap for the first 10 years will allow the cost of basic advice to be incorporated within the product charges, while maintaining excellent value for consumers. We will be reviewing the effects of the cap in 2008, to consider whether the market has developed such that there is significant price competition.

“We realise that, for less efficient providers these charge caps represent a challenge. But it is only right that firms are challenged to increase efficiency so that they can offer customers the best possible deals. For those firms that are able to exploit innovative and efficient ways of distributing stakeholder products these charge caps represent an excellent opportunity for profitable growth.”

Andrew Smith, Secretary of State for Work and Pensions, said:

“Stakeholder pensions have already made a significant impact on pensions provision with nearly 2 million sold. We must now meet the challenge of encouraging more people on lower and moderate incomes to save for their retirement.

"The new suite of savings products will be easier for people to access and they will be risk-controlled. In the case of the pension product we are requiring providers to move funds into less volatile investments in the run-up to retirement as a safeguard against investment risk. Following an extensive consultation with consumer groups, experts and providers we have decided that a revised charge cap is appropriate.

"The new structure will incentivise providers to market the new stakeholders more actively, and continue to guarantee a very good deal for the customer. Because the charge falls after 10 years, people will be encouraged to save for the long term."

Notes for editors

1. Ron Sandler’s review ‘Medium and Long-Term Retail Savings in the UK’ was published in July 2002. The review found that the competitive forces in the long-term savings industry drive towards greater complexity, not simplicity, of products, and that this leads to distribution economics which make it difficult for low/middle income consumers to access products.

2. The Review suggested that the key to the solution lay in product regulation:

Product regulation provides an embedded means of protection that does not rely on advice and so minimises the fixed cost element of interacting with the consumers.

The Review therefore recommends the introduction of a suite of simple and comprehensible products, the features of which would be sufficiently tightly regulated to ensure that, with certain additional safeguards, these could be purchased safely without regulation advice.

3. In July 2003, the Government announced details of these new “stakeholder” products.

4. Deposit account: for savers with short term investment goals, the existing CAT-standard cash ISA will become part of the stakeholder suite. The rate of interest payable must be within 1 per cent of the Bank of England Base Rate. This is a reduction from the current 2 per cent margin allowed.

5. Medium term investment product: there will be two investment options, both with a maximum equity exposure of 60% of the fund’s value:

A unitised investment, which may be a unit trust, an open-ended investment company or a unit linked insurance product. There will be a limit of 60 per cent on the value of the investment to be invested in equities and property.
A smoothed investment fund, which is broadly a smoothed unit linked arrangement. Volatility of returns will be reduced through smoothing, while additional features improve transparency for the consumer. The fund is not a conventional with-profits fund as it will not participate in the profits and losses of the business.

6. The charge cap will be 1.5 per cent for both types of medium term product for the first 10 years that the investor holds the product. Thereafter an annual management charge of 1 per cent will apply.

7. Modified Stakeholder Pension: the existing stakeholder pension is already a tightly regulated product. It will therefore become the pension product of the new suite of stakeholder products.

8. In order to make it suitable to be sold via the “basic advice” sales process the Government has decided that the stakeholder pension should be lifestyled. Lifestyling means that assets in the fund are gradually moved from equities towards fixed income investments as the policyholder nears retirement. The same charge as the medium term product will apply.

9. Stakeholder Child Trust Fund: the Child Trust Fund will be available within the suite of stakeholder products. The charge cap - 1.5 per cent per annum for the life of the product - has already been announced.

10. Deloitte Research: in July 2003 the Government announced that it had commissioned Deloitte to conduct independent research into a variety of charge caps. The results of that research are published today and are available on this website.

11. Consultation: the Government has consulted widely since the publication of the Sandler Review on the product specifications, including the charge caps and investment restrictions that should apply to these products. Officials have consulted at length with representatives from consumer groups, asset managers, banks and the life industry.

12. New Regulatory Regime: The products may be sold through a “basic advice” process that the FSA has been market testing over recent months. This will help to reduce providers’ costs allowing them to reach out to a wider market, particularly those on lower and moderate incomes.

13. Media enquiries should be addressed to Simon Moyse at the Treasury press office on 020 7270 4420.

14. Non-media enquiries should be addressed to the Treasury Correspondence and Enquiry Unit on 020 7270 4558 or by e-mail to public enquiries: enquiries@hm-treasury.gov.uk.

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