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Compulsory provision wouldn&#39t erode IFAs&#39 role

The public are becoming increasingly aware of the reducing role of the welfare state in areas such as pensions and long-term care. However, awareness alone will not lead the public to make higher levels of private provision.

The latest estimate is that up to five million working people have not made any pension provision above what the state provides and only around 30,000 people have taken out long-term care products.

It would seem that most consumers would rather use their earnings for immediate consumption than to make provision for the future.

This raises the question of how to encourage the public to make higher levels of provision. One of the key areas of debate at the moment is whether compulsion is the answer so that individuals are less reliant on the state when they reach retirement.

The introduction of any levels of compulsion in respect of pensions and long-term care will have a significant impact on the role of the IFA.

Of course, we already have one level of compulsion through the National Insurance scheme and advocates of compulsion argue that this should be extended in order to force more people to provide for retirement and care in old age.

The arguments for compulsion can be compelling.

The moral argument is that, without compulsion, those who do save voluntarily will end up subsidising those who have chosen to make inadequate provision for themselves.

Furthermore, compulsion may reduce the charges on products as there will be no need for selling costs such as commission to be taken into account.

Therefore, the argument is that the public should be compelled to make a minimum level of contributions to a personal account which will meet their basic pension and long-term-care needs.

However, compulsion may not be the answer for a number of reasons. First, it does not necessarily lead to higher levels of additional private provision and can just act as a redirection of existing savings.

For example, three million people in the UK who have contracted out of Serps with a personal pension have not been motivated to make additional provision on top of this basic amount.

Second, compulsion would be difficult to introduce politically as it would be seen as a form of taxation.

Compulsion could merely lead to an avoidance or evasion culture through a larger "black" or "grey" economy. There is a direct correlation between the rise in compulsory social security contributions and the increase in size of the "grey" economy in Germany over the last 30 years.

High levels of compulsion could lead to fewer jobs if employers are required to make contributions. More people will end up with little private provision because they spend their lives in a cash economy.

Even at the existing levels of NI contributions in the UK, the Government has found it necessary to announce anti-evasion measures to stop employers paying employees in vouchers not liable for NI rather than in money.

Therefore, IFAs should not be pessimistic about the possible introduction of compulsion as other methods of enc ouraging provision will inevitably need to be introduced and it is in this respect that advice will still be required.

For example, employers may have a bigger role to play in encouraging private provision. The advantage of employers distributing pension schemes is that it is easier for employees to have deductions made from their salaries.

The US experience with 401k pension plans could be an important experience to learn from. With such schemes, employers have a substantial personal incentive to encourage employees to make voluntary contributions.

The schemes work by allowing tax relief for higher-paid employees – directors – only if pensions are provided for a minimum percentage of the workforce. The benefit of this approach is high levels of employee participation even for small companies.

Overall, it is unlikely that compulsion will be seen as the only answer to bring about greater private provision. There will still be a huge market for the IFA to thrive in.

Employee benefits&#39 planning and retirement advice will continue to be key markets for the IFA, whatever level of compulsion we see introduced.


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