The stakeholder environment will offer IFAs the single biggest sales opportunity since the Pensions Act 1995. The potential is not simply to sell pension schemes to employers who currently do not have one. There is also an opportunity to review existing pension arrangements. The good news is that this opportunity is available immediately. By offering to review pension arrangements now, IFAs can:
Attract new clients who already have an arrangement.
Protect existing clients from an approach by other advisers.
Position themselves to focus fully on stakeholder when it is introduced next year.
The opportunities can be divided into two main areas – group and individual schemes. Let us consider each in turn and see where transfers fit into the picture.
When stakeholder pensions are introduced in April 2001, every employer in the UK with five or more employees will be required by law to offer their employees access to a suitable pension arrangement. Employers with existing pension schemes may be able to qualify for exemption from the stakeholder access requirements, provided their schemes meet certain criteria. This has begun to trigger a wholesale review of existing schemes and IFAs have a key role to play in guiding employers through this process.
Some schemes may not need to take much action to offer exemption from stakeholder but a formal review will be needed to confirm this.
Offering such a service will affirm the IFA's relationship with their client. If no review is undertaken or at least offered, the client may be approached by other advisers providing such a service. A review may also reveal other opportunities such as executive pension planning and worksite marketing.
Some schemes may need to widen their current terms or membership to offer exemption, providing substantial new business, while some schemes may benefit from transferring to a new provider.
Certain schemes will be more suitable candidates than others for such a transfer but possible indicators include:
Schemes where the administration and/or investment performance has been poor.
Schemes which offer full transfer values with low or no exit penalties.
Schemes which have relatively large funds under management and which may be able to obtain more competitive terms given their fund size.
Schemes which have relatively high charges.
Schemes where the provider is unable to offer facilities for advanced technology support.
Schemes where the existing provider is not committed to the market sector and may be liable to pull out. Some contracted-in money-purchase schemes may be an obvious target here.
Specialist pension companies, such as Scottish Life, are preparing a full range of support material to provide IFAs with everything they need to complete the process of reviewing schemes.
Obviously, each scheme has to be considered with care to justify the reasons for transferring. Nevertheless, the market is undergoing significant change and there are occasions when you can add tremendous value for your clients by switching to a new arrangement.
It may even be possible to set up a replacement scheme within stakeholder margins and still retain an allowance for improved commission.
There are similar opportunities for individual pensions arising from rebroking old-style contracts to obtain better terms. Many people could benefit from being updated to a modern, flexible type of plan.
To survive in the stakeholder era – and to prosper — IFAs should consider focusing on the areas where they can add the most value. There are a wealth of opportunities for IFAs covering all aspects of moving pension funds from one home to another.
Moving from a retirement annuity to a personal pension plan offers opportunities to increase the available tax-free cash, increase the death benefits, reduce the minimum retirement age and maximise retirement option flexibility.
The regulations for pension sharing on divorce will take effect from December 1. This could be the ideal avenue for those not in the transfer market to enter it and develop professional connections, particularly with solicitors.
Former spouses will have the opportunity to have a share of their ex-partner's pension fund, which will be called a pension credit. They can then place this into a pension vehicle of their own.
Under the regulations, pension schemes must offer the former spouse a transfer value to be taken from the parent scheme to another approved pension arrangement.
They can also offer the spouse a pension benefit within the scheme. This does not have to mimic the existing scheme benefits exactly but it does have to offer a value equivalent to the amount of pension credit the former spouse has obtained as a result of the divorce settlement.
As the implementation date approaches, it is clear that many trustees have decided to take the option of enforcing a transfer of the pension credit out of the scheme. While there are a number of issues arising from this, the key point is that many people will urgently be seeking advice from their solicitor not only on their options at divorce but also as to what they should do if they receive a pension credit.
There are many other opportunities for clients to improve their pension benefits by considering a transfer.
Compared with leaving benefits in a previous occupational scheme, taking a transfer value can result in improved death benefits and greater flexibility over when to retire and over what kind of pension benefit to take. We have not even considered how income drawdown might come into the picture.
If you want further information, Scottish Life has produced a Transfer to the Winning Team pack which covers many of these opportunities. It also covers some of the compliance aspects which must be considered.
It is said that every adversity carries the seed of a greater benefit. Precisely because stakeholder is causing great changes, there are big opportunities too. The transfer market represents such an area of opportunity for IFAs for at least two specific reasons:
The market is already big and is likely to continue to grow. Changing work patterns mean the
opportunities are unlikely to decline.
Generally, pension transfers are complicated and require independent advice.
IFAs targeting the transfer market are likely to add value not just for their clients but for their own business prospects too.