An Analysis of the UK Stakeholder Pension Initiative Trevor Matthews CEO, UK Life & Pensions Standard Life 41 st Annual Seminar International Insurance Society Hong Kong 13 July

Outline  Perceived Problem  Suggested Solution  Contagion Effect  Life Company Reaction  Results  Way Ahead 2

Perceived Problem  UK had one of world’s most highly regarded pension systems in 1980s  Three pillars  Valuable tax incentives  But inadequate coverage 3

Suggested Solution  Compulsory for all employers with more than 5 employees to offer low-cost stakeholder plan  1% p.a. price cap (single charge)  No other charges up front, on exit, on members, on transfer  Naïve assumption – if cheap enough people will buy 4

Contagion Effect  Other products brought into line  “Stakeholder friendly” pensions  Single rather than multiple charges 5

Life Company Reaction  Reduced initial commission from 75% first year’s premium to 25%  Some life companies also reduced charges on in-force book to avoid risk of re-broking 6

Life Company Reaction Profit profile – Individual Personal Pension First year allocation rate 70% and initial commission 30%. (£200 per month, 20 year term) Year Profit Sig 7

Life Company Reaction Profit profile-Single charge Stakeholder pension Initial commission 23% of premium. (£200 per month, 20 year term) Year Profit Sig 8

Results  Very disappointing take-up  35% of organisations provide access  (80% for those with staff)  42% have no members (“empty boxes”)  52% have less than 25% of workers enrolled  Median contribution only 3%-5% salaries 9

Results 10 New Regular Premium Individual Pensions by Product Source: PPI (2003)

Results 11 Source: PPI (2003) Single Premium Individual Pensions by Product

Results  Damaged financial position of life offices  Effectively prevented distributors from charging fees  Stakeholder offered value to employers, too good to be true  Life companies cut initial commission to 8% end

Way Ahead  Aussie comparison – Compulsory super contribution of 9% of salaries – 88% workforce covered – Charges of A$1 per week plus wholesale investment management fee => 1.2% p.a. – Advisors focus on changing jobs and retirement – real value added 13

Way Ahead  Turner Commission recommendations due late 2005  More wrap type products where interests of client, adviser and provider are more naturally aligned 14