nz retirement planning, lessons from the uk - university of...

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?