|
The
first choice for people in pensions Pensions
Age has been designed to provide pensions professionals with a single
and authoritative source |
|
Rethinking
pensions for the wealthy Whatever the short-term blips in the UK economy, the inexorable rise of the high net worth individual continues. Around three per cent of the population now has liquid assets greater than £50,000, and this will double to six per cent by 2005, according to marketing consultants The Henley Centre. Throughout Europe as a whole, the picture is similar, with the number of people categorised as “mass affluent” expected to rise to 30.3 million by 2004, from 22.8 million just 18 months ago. Among them, these individuals will own £5.4 trillion in liquid assets according to recent research from the data and industry analysis firm, Datamonitor. But how has the financial services industry responded to this booming market? Has it been sufficiently proactive in servicing the well-heeled individual? And in particular, has it developed pensions products which are tailored to the wealthy? David Hanratty, investment director of Nelson Money Managers, which provides wealth management services primarily for company employees, does not think so. “The financial services industry has not kept pace with the growth of this market, because existing products are too profitable,” he says. “Collective vehicles – such as unit trusts – which allow a spread of investment are designed for people with as little as £1,000 to invest, but independent financial advisers (IFAs) still recommend them to people with £50,000 to invest. The industry is secretive about charges, and these products have opaque charging structures.” Typically, a packaged product will have a five to six per cent initial charge and a 1.5 per cent annual management charge. “Furthermore, most insurance products are tax-inefficient because they have internal tax charges,” says Hanratty. “Firms want to sell products off the shelf, but clients want an individual solution. In fact, segregated management can be as cheap as collective products. What you’re going to see in terms of addressing the affluent individual is the private banking style of service moving down to lower levels of assets.” However, David Bird, consultant with actuaries Towers Perrin, says that other factors are to blame for the lack of choice in some pensions products. “The biggest limiting factor on pensions is the earnings cap of £95,400 for the fiscal year 2001/02,” he says. “In fact, in terms of investment generally, these individuals are restricted from tax-efficient vehicles by their wealth. But it’s not the industry’s fault. Providers of off-the-shelf products don’t have anything more to offer, because there is no tax relief beyond a certain point for investing money. So what the wealthy are into is portfolio management, on a group or individual basis, and there are plenty of products around which offer that.” As for the pensions market, Bird disagrees with the premise that it is expensive. “Costs now are generally coming down,” he says. “Most pension plans now conform to the maximum one per cent annual management charges, in line with stakeholder. In fact, there is no reason why the wealthy should not buy stakeholder products – after all, what do these people want which is so different to what’s on the market? And if they do want something different, there are very flexible plans offering access to all sorts of investment media, such as self-invested personal pensions, or small self-administered pension schemes, if they own a company.” Of course, says Bird, if high net worth individuals want a different set of vehicles with more choice and flexibility, it is going to cost. “But if they are wealthy, why are they worried about charges anyway? In any case, the wealthy are not building up pension funds, because of the current low level of annuity rates. Having said that, if you are truly rich, you don’t need a pension.” There is indeed some evidence to support the idea that the wealthy are turning away from dedicated pensions products. For instance, The Henley Centre says that two to three per cent of people it has surveyed mentioned the use of buy-to-let properties as pension income. But one problem for providers is that high net wealth individuals are not a homogenous group, says Rachel Clare, project director with The Henley Centre. “The opportunity for providers is huge, but it requires different approaches,” says Clare. “New wealth isn’t the same as old wealth – it may come from windfalls or the sale of property. So these individuals don’t always come from families used to dealing with money. Some providers make the mistake of thinking that the fact a client has £50,000 to invest means they’re confident with finance. But although there are high net worth individuals who are very confident and prepared to take risks, others need a lot of reassurance and guidance and want investments which are more secure.” Ro Perera, head of IBM’s wealth management practice, which helps IFAs and financial institutions design and implement business solutions to meet financial requirements, agrees that there is no one-size-fits-all solution. “Servicing the high net worth individual means additional complexity, as these people have more wealth,” he says. “Providers need to consider the issue of bundling – that is, how they can put products together to meet a need. There are some areas, such as insurance, where providers could look at a more complex bundling of assets.” Some providers are tackling the market by launching branded wealth management services, such as Abbey National’s Inscape, and Lloyds TSB’s Create. “The products are there, it’s all about how you pull them together,” says Martyn Begbour, head of business development for private client services at HSBC Private Clients, which set up a joint venture with Merrill Lynch six months ago offering a range of services to individuals with £100,000-plus of liquid assets. “What matters is how you structure the products, adding extra services such as discretionary management, for example.” On the one hand, dependent, opinion-seeking clients can get their decisions made by HSBC’s private client arm, and on the other, those individuals who want to manage their own portfolios are offered access to Merrill Lynch’s analysts’ information and stockbroking services. “Some IFAs do go down the product-driven route,” says Begbour. “But with some of these high net worth clients, a pension product may not be the only solution. For instance, if they have got potential capital gains tax liabilities, then we would suggest they look at venture capital trusts or enterprise investment schemes. As an industry, we have got to get far more sophisticated and better trained. We have to meet consumers’ needs, work in the context of their tax situation, and make sure that there are skilled people at the front end.” Jerry Barnfield, director of pensions development with Norwich Union, argues that product providers can come up with variants on the mass market products to suit a more sophisticated audience within the pensions framework. “I think there has been a radical change to personal pensions, partly due to stakeholder, but also to customers’ needs for a simple proposition and appropriate choice,” he says. “But I would argue that products have kept up, through investment choice and competitive charges. So in our proposition, we serve the different needs of the market through fund choice and a charging structure that reduces as funds get larger.” The more sophisticated Norwich Union customers can use the full range of the company’s funds, while annual charges start at one per cent and reduce on a sliding scale with fund size, to a minimum of 0.8 per cent on funds worth £50,000, which means that customers pay proportionately less for investing larger amounts, and as their funds build up. This
approach has since been copied by other pension providers. Barnfield
says that many wealthy people are now also taking out stakeholders
for a non-working spouse, or for their grandchildren. However, in
spite of the innovative approach taken by some, if not all pensions
companies, providers still face one big obstacle in catering to
the needs of the wealthy. “There is a huge mistrust of the industry
following on from the misselling scandal, as well as what has happened
with Equitable Life,” says Rachel Clare. “So although people are
aware that they don’t have financial expertise themselves, they
don’t know who to trust. Consumers tend to keep money in separate
pots, and this may work against attempts by providers to give a
holistic service, or a bundled product.” BACK
TO NOVEMBER FEATURES
|
||