Industry shuns new low-cost savings plans

The long-awaited launch of the “Sandler suite” of savings products this Wednesday got off to a disappointing start with just three providers offering new versions of the government-backed low-cost savings plans.

The new regimeregime aims to give consumers access to a variety of competitive deposit accounts as well as to medium-term stock market investments similar to unit trusts.There are four types of new savings plans, dubbed “Sandler” products after the former Lloyd’s of London chief executive Ron Sandler who first proposed them three years ago: stakeholder deposit accounts; medium-term investments; child trust funds (all launched this week); and stakeholder pensions (introduced in 2001). They are aimed at people on lower incomes who are effectively priced out of the investment market.

But only a handful of financial groups, including Legal General, Norwich Union and Nationwide, have entered the market with stakeholder-style share-based products, and there have been even fewer companies launching new stakeholder deposit accounts.

These latest savings and investment products join the existing stakeholder pension, first started in 2001, and the Child Trust Fund, which was also launched on Wednesday and includes a separate stakeholder option.

The Sandler products are a key plank in government strategy for improving confidence in pensions and savings and closing Britain’s £27bn annual “savings gap”.

The criteria for the new investment funds launched on Wednesday include a capped annual management charge of 1.5 per cent for the first 10 years and 1 per cent thereafter. In an attempt to reduce risks, the new funds can only hold up to 60 per cent of fund assets in equities and property and must be well diversified across different stocks. The remainder of the fund must be invested in lower-risk assets such as cash or bonds. Transfers between providers are free.

The rules for the stakeholder deposit accounts are that they must pay interest no lower than 1 per cent below base rates, they must permit unlimited withdrawals as well as free transfers between accounts. Providers must also accept deposits from as little as £10.

But while most companies welcome the concept behind the government’s new schemes, many are not surprised by the lack of enthusiasm from the industry.

Towers Perrin argues that the government’s projections behind the launch of the new accounts were flawed from the start. Chris Johnson, managing director UK and Ireland at the actuarial consultant, says that the volume assumptions used by the Treasury to illustrate potential profitability margins for providers from the stakeholder products were “optimistic and unrealistic”.

He says that the minimum premiums needed for financial services companies to break even would need to be significantly higher than those implied by the Treasury’s analysis.

“For example,Using the Treasury’s assumptions we estimate that retail bank providers would need customers to make monthly contributions to the products of around £48. We think that a more realistic break-even figure would be £94 – which is clearly going to be much harder to achieve,” he says.

Towers Perrin also points out that the 60 per cent limit on equities for the new medium-term stakeholder product could cost long-term investors up to 1 per cent per annum in expected gross returns, compared to a 100 per cent equity product.

He says that the economics of the new stakeholder products mean that providers will only make an acceptable return if self-directed, higher income customers seek out and buy these products in volume.

“Given this, it is unlikely that many organisations will enter this market,” he says.