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A defining time for pensions

2002 seems to be the year of the review. On the pension front, the Pickering report was published just after Sandler in early July while the Inland Revenue&#39s recommendations on tax simplification are still to come.

IFAs&#39 employer-sponsored pension dealings are mainly of the defined-contribution kind, mostly in the shape of GPPs, stakeholder and AVCs with a smattering of DC occupational schemes.

The Pickering proposals largely ignore such specialist areas as small self-administered schemes, self-invested personal pensions and executive pension plans and focus on the mainstream instead. How will its recommendations, if enacted, affect IFAs and their clients?

Much of the report&#39s content is taken up with defined benefit but there are some key issues involving DC. Pickering identifies as many as 15 existing types of DC arrangement – a potential minefield for financial advisers as well as their clients. The report recommends that the list should be slimmed down to just two -all forms of employer-sponsored DC arrangements and individual pensions (including those to top up occupational schemes). There would also a separate category for DB occupational provision.

This could mean an end to having to choose between AVCs and concurrent stakeholder/personal pensions as a means of topping up main scheme benefits. Much will depend, however, on the outcome of the Inland Revenue review later this year. Will this see an end to the £30,000 salary concurrency threshold for stakeholder/personal pensions and what about the availability or otherwise of tax-free cash? We will have to wait and see.

Pickering advocates the introduction of compulsory membership but this time for employer-sponsored arrangements of all kinds and not just for occupational schemes.

There would, however, be a string attached – the employer would have to contribute 4 per cent of employees&#39 salaries or more. Members would also be required or actively encouraged to pay in as well. If enacted, this development should prevent or dissuade employees opting out and spending money that would otherwise be invested for their future retirement.

Another Pickering recommendation advocates the active encouragement of small employers to club together and establish a “multi-employer” scheme.

This should bring the advantages of economies of scale and, therefore, reductions in unit cost.

A development of this kind could pose either a threat or opportunity for IFA firms. Those that continue to promote small DC arrangements to small corporate clients may run the risk of losing out to competitors which seize the chance to bring local businesses together in one much bigger scheme. There may even be the possibility of branding the multi-employer arrangement with the name of the IFA firm.

To work effectively, such an umbrella arrangement would need efficient administration and communications support. Some DC pension providers are better equipped to supply this than others. This leads me on to the recommendations for effective communications with employees/members at grassroots level. Much of what is proposed is already standard practice in well run DC schemes. If enacted, the proposals would formalise the str- ucture to be used.

According to Pickering, the information to be given should be aimed at influencing such decisions as whether to join, stay in or leave a scheme. Also “all communication with members should be tested to see whether it understandable and will work”.

For many providers, these proposals merely reflect the status quo. Then there are the communication media to be used. Pickering recommends internet and intranet to support traditional hard copy. But some providers have already gone two stages further by running presentations in the worksite and offering phone access via a dedicated call centre.

These DC specialists have also pre-empted another of the report&#39s proposals – that the message to be communicated should be tailored to the particular stage that a member has reached in their participation in the scheme.

The information relevant to a prospective joiner, for instance, should be very different from that for someone who is approaching retirement age or who has started to draw their pension.

Sandler and Pickering are now out in the open. The Inland Revenue report on tax simplification is still to come. Watch out for it. It will almost certainly have major implications for IFAs and their clients.

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