Defined Contribution Is the Future for Retirement

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Byline: Mike Foster

It is significant that Ron Sandler and Alan Pickering published reports on UK retail savings and pensions as the FTSE 100 index was sliding to a five-year low.In the absence of market recovery, tax hand-outs and savings compulsion, their reports will not stop the move away from defined benefit and the fall in retail fund sales. "Defined contribution is the future," says one analyst.

Government concern about the agonies suffered by individual savers and pension sponsors means key aspects from both of their proposed systems are likely to be adopted. Sandler's report, drafted by Daniel Oppenheimer of the Treasury, is seen as having the best chance of full adoption.

In contrast, certain Pickering recommendations in such areas as spouse benefit abolition are seen by the government as politically unacceptable. Others are sensible, but a final decision on Pickering has to await an Inland Revenue review of the industry.

Analysts applaud the way Sandler has pointed out that independent financial advisers (IFAs) lack independence because of their reliance on commissions paid to them by managers.

The payment of commissions helps explain why the 92% of schemes put forward by IFAs are active rather than passive, even though statistics suggest that, on average, passive schemes provide more reliable long-term returns.

Sandler points out that tracking errors for balanced funds have fallen from 3%-4% to 1% over 10 years. He says: "The result is likely to be that undiscerning retail investors will pay charges appropriate for active management in return for management which is quasi-passive."

Sandler also criticises with-profits schemes because of their opacity, and the way in which insurance company shareholders share in surpluses. But Sandler leaves the door open for IFAs, active managers and with-profits providers to continue to offer "stakeholder" retail products to the masses.

He demands that their offerings should be simple. He says that with-profits returns should not be shared with holding companies and he wants the creation of an IFA system where services are paid by the consumer, although fully disclosed commissions could be used by other advisers to offset this fee. …