Forum Brief: Stakeholder charging

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 one per cent of the Bank of England Base Rate.  This is a reduction from the current two 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 one per cent thereafter.

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

Government Response: HM-Treasury

Ruth Kelly financial secretary , 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.”

Party Response: Liberal Democrat

Vince Cable MP, said: "These changes are the latest example of the government making up pensions policy as they go along. Their flagship stakeholder pension has failed miserably and these are sticking plaster solutions.

"The real problem is that millions of people are not saving enough for their retirement. Increasing stakeholder charges will not encourage people to save more. A small increase in the charge is unlikely to encourage pension providers to sell pensions to the target group - those who will be unable to invest large amounts of money.

"It is vital that people get a decent state pension to retire on, and that they have affordable, reliable and simple products into which they can make additional pension savings."

Forum Response: Consumers' Association

Mick McAteer, principal policy adviser, Consumers' Association, said: "Proposals to reduce consumer protection will be a huge incentive for companies to mis-sell. The FSA seems to have chosen to address the long-term savings crisis with an approach that rewards an inefficient industry by stripping it of any responsibility for its actions.

"Consumers' Association is particularly concerned by the implication that the stakeholder sales regime is merely a guinea pig for rolling out reduced consumer protection for the sale of other products in the future.

"The government is suggesting that group schemes will bring down prices.  To make this work the government has a responsibility to encourage the creation of group schemes and we are calling on the creation of a government task force to take this forward."

Forum Response: National Consumer Council

Jill Johnstone, director of policy at the National Consumer Council (NCC) said: "We are delighted that the FSA has listened to our concerns over its earlier plans for the stakeholder selling process, and has recognised that a basic suitability test is vital. Equally welcome is the decision to give stakeholder savers the right to redress if something goes wrong through the financial services ombudsman.