23rd July 2013

FundsNetwork: 25 years old and free at last

Many of us who have been involved in investment and financial products for some time can remember when pensions were an investment world unto themselves. Apart from full SIPPs, where the client had to pay a hefty annual fee, your choice of retirement products was limited to insured products including a selection of life office managed funds, maybe some external fund links and the with profits (or deposit administration) fund. The market has certainly moved on a great deal since those days with the overriding narrative taking us towards pensions as just another tax structure through which to deliver your investment proposition in pursuit of a client’s goals.

Of course, there remains (and always will!) debate among professionals on topics such as whether the asset allocation under the pension, at least prior to vesting, should be identical to that in ISA and collective portfolios. However the ever-increasing popularity of collective-investment-based pensions delivered through platforms has shown that the old ‘pensions are different’ adage seems to have been firmly laid to rest, at least outside the employer-sponsored part of the market. From a product designer’s perspective, a pension must support the full spectrum of advisory propositions, from those operating discretionary services to those recommending multi-asset funds as part of a low-touch strategy.

The pricing of pensions has also seen a quiet revolution over the past decade. When stakeholder pensions were introduced, most manufacturers claimed that pensions could not possibly be priced at the 1% each year level and operate effectively. While this was perhaps true of the early stage accumulation market where proportionately high commissions were needed to pay for the fixed costs of initial advice, the past decade has shown that for later stage clients consolidating their pensions, this level is achievable, although this will depend in part upon the level and nature of the service you provide to clients.

The last piece in the jigsaw is only now falling into place. The FCA – with Policy Statement 13/1 – and HMRC have manoeuvred, following demands from an increasing number of adviser firms, to complete the transition of the pension from a packaged product to a set of building blocks for the adviser to shape into a suitable whole for his or her client (tax structure, investment proposition, fee structure etc.). In response, pensions built on a truly ‘bottom-up’ basis are starting to emerge. These consist of a share class which just pays for asset management (rather than an expensive share class with complex rebates), straightforward administration costs (without deceptively low fixed switch fees which soon mount up and other similar charges) and are operated, subject to HMRC rules, with the simplicity of an ISA.

These changes can only be a good thing for the consolidation and decumulation market in which most advisers that we work with operate, although the old mass market for regular savings is now almost exclusively the province of employer sponsored schemes and NEST. In short, we have entered the era of the ‘Retirement ISA’ with monetary contribution limits, no guarantees, wide fund choice and transparent, competitive pricing.

Simon Farrant, FundsNetwork Head of Adviser Proposition 

Pensions