NZ retirement planning, lessons from the UK

1
NZ retirement planning, lessons from the UK

• Paul King
• Consultant, speaker trainer

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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

3
Pre-Stakeholder

• Stakeholder friendly schemes
• Single AMC charging model
• Providers need to manufacture plans that would
  not make the adviser fall foul of RU64

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What happened!

• April 2001, 50 Stakeholder schemes (circa 45
  providers)
• churning
• Adviser commission now at 1/3rd previous levels -
  best advice doesnt pay enough
• Target market will not pay consultation fees
• 80 of Stakeholders start as empty boxes

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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)

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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)

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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

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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)

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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?

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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?