The ABI proposals
1: Streamlined regulation for safe harbour products to cut the costs of advice and distribution.
2: Simpler private pension legislation which will encourage employers to offer and maintain pensions and encourage individuals to join schemes.
3: Wider availability of advice, including generic advice tools which can help people assess their need to save, and advice provided via the workplace.
4: A sustained Government education and awareness campaign which stresses the need to save for retirement as well as the dangers of not saving.
5: Additional incentives to ensure that adequate amounts are contributed to pensions.
Based on detailed analysis of points one two and five, the ABI has identified a potential £10bn reduction in the savings gap. Around half of this reduction will come from safe-haven products, which were end-orsed last week by the Sandler review.
The ABI's proposals are attractive because they address the three main requirements for making workplace saving a success:
A simple and cost-effective sales process.
A focus on the need for advice, not just simple products.
The right incentives for employers, not just employees.
Currently, it takes some two hours and 20 minutes to complete a workplace sale, including prospecting, travel, meetings and documentation. Add to this the effect of customers who do not eventually invest and the time rises to over three hours.
While this is four times quicker than a conventional face-to-face sale, it still puts workplace advice out of the reach of many employees. At stakeholder commission levels, an IFA is losing money serving any workplace customer whom he does not expect to invest £100 a month or more.
The safe-haven sales pro-cess and products designed by Oliver, Wyman & Company for the ABI would reduce the sales time to about 40 minutes all in or one hour, including the effect of lost sales. So the same IFA could now profitably serve customers who were willing to contribute just £35 a month.
However, the saver agent proposals go a step further. In order to make a success of worksite marketing, an IFA needs to have the skills to close the deal with the employer. As a highly skilled individual, it is perhaps not the best use of the IFA's time to sell small ticket cases to the employees.
Instead, it is proposed that the saver agent (perhaps a paraplanner in an IFA firm) would cover the majority of employees. The saver agent would follow a simple process designed to help the employee understand his or her circumstances and to make an appropriate product choice. As long as the correct process was followed, know your customer and the suitability test would no longer apply.
The process would be des-igned to avoid the major traps that a customer could fall into such as investing in long-term savings when he or she had no short-term rainy day savings. Because the saver agent would not be as highly trained as the IFA, he or she would expect to earn less and could therefore profitably sell even smaller cases, perhaps as low as £20 a month.
It is clear from our analysis and other studies that the key to increasing savings is increasing access to advice. Currently, 11 million households are effectively disenfranchised from advice because it is not economic for the industry to serve them. The saver agent concept provides a solution for the supply side by making it economic to serve many of these customers.
The demand side is add-ressed by the ABI's proposal for employer National Insurance credits, in return for facilitating workplace financial advice.
When surveyed (Continental Research, 2002), half of all small employers said they would facilitate financial advice for their employees if there were an incentive to do so. The ABI has suggested that allowing employers to reclaim the cost of basic workplace advice from NI contributions would be a sufficient incentive and that this could cut the savings gap by some £2bn.
A more radical proposal would be to make workplace advice compulsory. In this model, employers (of, say, more than five people) would subsidise a short annual financial healthcheck for each employee.
The adviser would be paid on a fee basis, with the fee offset by any commissions earned. Compulsory workplace advice could take as much as £11bn off the savings gap but would require a radical expansion of adviser numbers – perhaps another 23,000.
Finally, the ABI has suggested rewarding employers with tax breaks based on the take-up of the company's pension scheme. The pension contribution tax credit would provide a tax break to employers who manage to get, for example, two out of three employees to contribute to the pension scheme. The employer would also need to be making a reasonable contribution to the scheme.
This idea is similar to the situation in the US, where tax relief for individual directors and company managers is dependent on employee take-up of the company pension scheme. Perhaps unsurprisingly, this idea has had a major impact on employee take-up. In 1999, there were some 40 million members of 401(k) schemes in the US, up from 17 million 10 years earlier.
The ABI's proposals provide a comprehensive and holistic vision of the future of workplace advice and its role in reducing the savings gap. While the vision presents several challenges to policymakers, there is now some momentum for change. We can only hope that the momentum is sufficiently strong to carry us through from vision to reality, to a savings gap £10bn lower than it currently is.
The ABI proposals