The Court of Justice of the European Union decided today that insurance companies are no longer allowed to use gender as a factor for assessing risk. This change is effective as of 21st December 2012.
This means that from that date the rates for all types of insurance eg life, motor, incapacity will be the same for men and women. It will also affect annuity rates. Mostly, women will be disadvantaged by this since they benefit from better current rates due to their greater longevity and the fact that contrary to popular rumour about women drivers they constitute a lower moral hazard to motor insurers.
The bizare aspect about this Euro nonsense is that age discrimination still appears to still be allowed when it is now banned in many countries such as the UK.
Most investors are aware that their funds levy annual charges against their funds. These comprise the Annual Management Charge which ranges from 0.1% to around 1.8% or more for UK mutual funds. In addition the funds are required to publish certain additional fund charges such as custody and legal costs. These two items make up the Total Expense Ratio (TER).
Many investors are unaware of the fact that, in addition to the TER, funds incur costs in two other ways. One of these, the Portfolio Turnover Rate (PTR), is caused by the costs which fund managers incur when the buy and sell stocks. The more they do this, the greater the PTR. In the UK the estimated cost of a sale and purchase is around 1.8%, when Stamp Duty is taken into account. The average UK fund turns over its portfolio by around 100% a year, thus adding around 1.8% onto investors’ costs. Many funds have PTRs of twice or more this level.
A further area in which investors can incur costs is the price at which funds are able to deal in their shares. Generally shares are offered for sale or purchase by market makers in batches of say, £250,000 or £1Million. On dealers’ screens the best priced batches are generally shown at the top of the list with prices getting worse further down the list. A fund needing to offload £10Million of a particular stock could therefore find its self selling via a number of market makers and not all at the best price available on the market. This can be a substantial hidden drag on fund performance, especially for very large funds or those which trade actively.
So what can be done about this? Bearing in mind that the method of access to the market (fund selction) is very much a secondary decision, well behind Asset Allocation, the optimum way to keep fund costs down is to invest in passive or tracker funds. These can be expected to provide returns in line with the performance of the market at low cost. In addition certain passive funds engage in dealing strategies designed to optimise the price at which deals are carried out.
On 6th April 2010 the minimum age at which you can access your pension benefits will increase from 50 to 55.
Both your employer’s pension schemes (past or present) and any individual pension plan’s you hold will be subject to the new rules. From 6th April 2010 therefore, you will not be able to access pension benefits unless you are at least age 55.
There are some very limited circumstances where retirement prior to age 55 will still be allowed after this date which are detailed below:
1. Some sportspeople/those in hazardous occupations or those who had a ‘contractual right’ to an early retirement age as at December 2003.
2. Those individuals who are in ill health can still apply to take benefits early and the scheme trustees will determine, following a medical report, whether it will be granted.
In the majority of cases, it is more worthwhile to leave your pension benefits to grow for as long as possible. However, if you need to access some or all of your pension benefits early, between the ages of 50 and 55 you should contact your financial adviser as soon as possible for further guidance.
For the avoidance of doubt, this could affect you if your date of birth is between 7th April 1955 and 5th April 1960.
The BBC today reported that the top 100 UK firms have a combined shortfall on their Final Salary pension funds of £96Billion (yes Billion!). This represents a deterioration from a combined deficit of £41Billion at the same time last year. Most of the fall in value has been attributed to falls in share prices but changes in the assumptions, which are used to determine the level of funding needed to meet promised benefits, have also had a significant bearing. In some cases the value of the underfunding actually exceeds the value of the company.
The BBC article goes on to suggest that this will lead to more schemes being closed to new members. Of the top 100 companies, only three still offer Final Salary Pensions to new members. If you are interested, they are Cadbury, Diageo and Tesco.
What the article does not mention is that there are many more Final Salary pensions, mostly held on behalf of small to medium sized employers (and most people in Britain work for one of these rather than a top 100 firm). These will also be suffering from substantial deficits. The difference between a lot of the smaller firms and the top 100 firms is that they are often privately owned and therefore do not have the same access to additional capital as companies that are quoted on the Stock Exchange.
The issue with the smaller companies, who will be feeling the pinch every bit as badly at the moment is that, they are more likely to go bust and therefore be unable to make up the under-funding on their pension funds. Where this occurs the benefits will come under the auspices of the Pension Protection Fund, about which I have blogged before Protection for Final Salary Scheme Benefits could be under threat.
To cut a long story short, the PPF provides limited protection which, over time, can fall substantially short of what was originally promised. Furthermore, due to potential difficulties with funding the protection (based on levies charges to the remaining schemes which are already in financial difficulties) PPF benefits could need to be reduced in future.
So what should you do if you have final salary benefits either with your current or a previous employer? Well, for certain you should obtain details of the Transfer Value and the benefits to which you are entitled. These should be reviewed on your behalf by a pensions specialist (who will also take a whole range of other factors into account such as the state of funding of the scheme and the financial health of the sponsoring employer, amongst others). From this you will be able to form a realistic assessment of the safety of your benefits and whether you ought to move them to an arrangement that provides you with greater personal control.
If you are a financial adviser reading this article and you are not qualified to provide Pension Transfer Advice, consider referring your clients to an adviser who will work with you to ensure that your client’s needs are met in this regard.
New guidance has been issued by the Solicitors’ Regulation Authority (SRA) stating that Solicitors must not refer clients to tied or multi-tied advisers; i.e. advisers who are not truly independent.
The SRA has stated that it is aware that some law firms have been approached by multi-tied and tied advisers seeking to enter into restrictive arrangements to provide financial services to the law firms’ clients. It reiterated that firms must always act in the best interests of their clients. This means that they must refer clients to independent financial advisers for investment advice.’
According to Sifa (the body representing independent financial advisers who specialising in working with law firms), there is confusion among solicitors about the status of financial advisers and this has resulted in widespread breached of the Solicitors’ Code of Conduct. Sifa said it had received numerous calls from IFAs reporting instances of solicitors referring clients to St James’ Place.
This was a subject alluded to in an earlier Blog entitled Confusion on Sources of Financial Advice I have also commented here in more detail about the differences between Independent and Tied Advice.
So, if you are a Solicitor or indeed anyone seeking financial planning advice make sure that you ask the adviser whether they are genuinely independent. Solicitors can be sanctioned for failing to do so and individuals are likely to suffer from a restricted choice and, in all probability, high charges
The Telegraph on 17th July published a list of tips for investing in a recession, which included a contribution by me!
For top investment tips click here
In summary, my view is to be systematic and disciplined … and keep costs down.