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The Actuary The magazine of the Institute & Faculty of Actuaries

Tillinghast vs Treasury

According to Tillinghast analysis, the persistency, penetration, and volume assumptions used by the Treasury (as advised by Deloitte) to illustrate potential profitability margins for providers from the new stakeholder products are optimistic and unrealistic. Tillinghast estimates that the anticipated minimum premiums needed for financial services companies to break even will need to be significantly higher than those implied by the Treasury’s analysis – in some cases double in size. For example, using the Treasury’s assumptions – and allowing for the increased charge cap of 1.5% for ten years – Tillinghast estimates that retail bank providers would need customers to make monthly contributions to the stakeholder savings products of around £48. But Tillinghast believes that a more realistic figure would be £94. A realistic minimum lump sum contribution through the same channel would be over £3,000.

Tillinghast also estimates that on more realistic assumptions, the returns to shareholders are likely to be too low, in contrast to the published estimates.

Given these observations, Tillinghast says that many financial services companies will decide against selling stakeholder products. And those companies deciding to market them will do little to target people on low to middle incomes, the main target of these products, because of the need for high break even case sizes. As a consequence, these proposals will represent little progress towards closing the savings gap.

Tillinghast principal Andy Cherkas said: ‘We believe that some of the Treasury’s conclusions concerning the economics of stakeholder products for providers are derived from a string of assumptions, each one of which may be achievable on its own for some providers, but taken together appear to us to be too optimistic. For example, estimated lapse rates of 1.3% for pensions and 3% for savings appear to us to be low when considering the target market and the portability of the underlying contracts.

‘Providers are only really likely to be able to make an acceptable return on stakeholder products if self-directed, higher income customers seek out and buy these products in volume.’