Executive decision
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The executive pension plan is dead. All hail the executive pension plan. Strange as it may seem, the humble EPP might be about to make a comeback.
In April 2006, you would have been hard-pressed to find someone that did not think that EPPs were about to go the same way as the dodo. Their special powers allowing higher tax-free lumps sums and contributions had been removed. Some insurers were offloading the onerous new HM Revenue and Customs reporting requirements on to EPP trustees and employers and there were new rules about trustee knowledge and understanding.
The pundits were proved right. Sales fell off a cliff and are now less than a tenth of what they were during the EPP’s heyday in the late 1990s.
But the FSA might just have come to the EPP’s rescue. The central theme of its retail distribution review is a shift from commission to fees or adviser charging. Adviser charges can come out of the product recommended but only on a £1 of charges equals £1 of payments to the adviser basis. This means that indemnity commission (what they call factoring) is banned, making it difficult to pay advisers for regular-premium sales.
But there are two notable exceptions - stakeholder pensions sold with basic advice are exempt from adviser charging and occupational schemes are out of the scope of the RDR altogether.
This means that both stakeholders (if sold via basic advice) and occupational schemes (of which an EPP is one type) can pay old-style indemnity commission.
From the provider’s point of view, indemnity commission paid on single annual management charge products is the equivalent of financial madness. Break even in year 15 if you are lucky but by that point you will have already sustained heavy losses on the business that did not get that far.
Capital is a scarce commodity - flushing it down the toilet in the hope that some of it will wash back onto the beach is no way to run a business. Even those that have doggedly continued this practice - apparently it is all down to the quality of the underwriting - realise that the end is nigh.
So, that kills the stakeholder idea off but, unlike stake-holder, EPPs need not be single charge. Providers who wanted to market EPPs could use front-end charges like nil-allocation periods, reduced allocations and capital units to cover the cost of indemnity commission without the capital strain associated with single annual management charge structures.
EPPs are still left with the trustee knowledge problem and the hassle of tax reporting but centralised trusts allow employer involvement to be cut to a minimum. To the buyer, this sort of scheme appears almost identical to a personal pension. In fact, the consequences of the RDR open the door to a host of other potential occupational pension comebacks. Anyone for a Hancock annuity?
John Lawson is head of pension policy at Standard Life
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