Millions of workers in company pension schemes face an impoverished old age unless they increase contributions, according to a report by consultant WM Mercer.
Money-purchase schemes are particularly vulnerable, with the report suggesting that many members may have to double their contributions to get the pension they expect.
The report blames the shortfall on longer life expectancy, falling stockmarket returns, extra taxes on pension funds and low annuity rates.
Prior to April 6, 2001, the traditional method of topping up a company scheme pension was through an AVC or FSAVC. But the new concurrency rules now allow members of a final-salary or moneypurchase occupational scheme to make contributions of up to £3,600 a year or £300 a month to a personal pension in addition to any contributions being paid to the occupational scheme, including AVCs.
However, the concurrency rules apply only to those who are not a controlling director and whose annual earnings are £30,000 or less.
An important point to remember is that earnings for concurrency purposes are P60, that is, gross taxable income (excluding P11D benefits in kind) after pension contributions have been deducted.
Experts believe that 89 per cent of the UK working population – around 24 million people – earn £30,000 or less. The Inland Revenue in turn estimates that eight million members of occupational schemes will be eligible to take advantage of these new rules, highlighting the potential size of the market for IFAs. Yet this is a market that seems to have been largely overlooked.
Let us look at how the concurrency rules will work.
Personal pension or AVC?
One of the key advantages of the personal pension route is that 25 per cent of the accumulated fund can be taken as tax-free cash, unlike post-1987 AVCs where tax-free cash is not directly available.
Also, the personal pension fund does not count towards maximum Inland Revenue benefits, which means that an occupational scheme member could have a pension of two-thirds of final salary plus whatever is provided by the personal pension contributions.
It is estimated that two million people currently pay a total of £118m a year in AVCs so there is an opportunity to review these to see whether future AVCs should be directed to a personal pension. The new rules also provide a number of additional opportunities for IFAs to advise clients on how best to boost their retirement savings now that there are more options.
We have already noted that eight million people can potentially benefit from the concurrency rules. Let us now look at a client who can have his cake and eat it.
Benefits of concurrency
Take as an example a worker who earns less than £30,000 and is not a controlling director. He is now allowed to pay up to £300 a month gross (£234 net) into a personal pension.
He can contribute up to 15 per cent of earnings into his occupational scheme or any AVC arrangement and still make his personal pension contributions. He can also take 25 per cent of the accumulated fund from his personal pension arrangement as tax-free cash. This option is not available under a new AVC scheme.
He can enjoy the benefits from his occupational pension plus those from his personal pension. Concurrency opens up a world of opportunities for pension planning. Have you made clients aware of these?
Experience has shown that face-to-face employee meetings, either in groups or individually, result in a significantly increased take-up rate for any form of pension arrangement. Worksite marketing is therefore one of the best ways to promote these opportunities and your service to clients.
Worksite marketing is an employer-supported programme where products and/or services are offered to employees and, in some cases, dependants. The cost is met by the employee, usually through a payroll deduction system, although sometimes it may be subsidised by the employer.
In practice, it encompasses a collection of ideas and practices revolving around the distribution of products and services via the workplace. Distribution can be by post, the internet, phone or face to face.
Worksite marketing is not a new concept. In fact, it has been heavily used in the marketing of pension plans in the US and Australia. These models of pension provision have been influential in the UK Government's development of stakeholder pensions.
In the US, worksite marketing has been highly successful for some time. Consider that growth in premiums from sales of individual health products sold through worksite marketing increased by 28 per cent over a five-year period while sales from other channels fell by 68 per cent.
A survey of 1,000 consumers across the US found that employer-sponsored programmes produce the highest purchase rates per contact. Fifty-six per cent of consumers attending worksite presentations bought some form of life insurance compared with a 25 per cent success rate from traditional agent contacts and 2 to 3 per cent from direct mail.
Closer to home, there is significant worksite marketing activity in the Irish financial services industry. Taking the example of Irish Life & Permanent, 25 per cent of its overall premium income comes from worksite marketing activity. However, there are conditions which make success easier to achieve, for example, about 60 per cent of the Irish workforce have salary-deduction facilities.
So utilising worksite marketing and taking the time to put together a marketing plan with the correct support material can greatly enhance sign-up rates. Six key stages for success in marketing concurrency business in the workplace environment are shown in the table (left).
The implementation of effective worksite marketing techniques will be key to the future success of IFAs in the rapidly evolving financial services market. To this end, IFAs, assisted by product providers, must begin to integrate worksite marketing practices with traditional distribution methods. Those who fail to take up this challenge risk missing the real opportunity which the introduction of stakeholder has created.
Now is a good time to encourage members of occupational pension schemes who qualify for concurrency to pay additional contributions using personal pensions and to review existing AVC arrangements. So what is stopping you?
WORKSITE MARKETING IDEAS
Make an impact with posters promoting your services around the workplace.
Make people think about their future and raise awareness of your services with, for example, postcards which can be mailed or given out to employees.
Make maximum use of company payslips or other regular communications by inserting promotional flyers.
Have group meetings with staff ensuring your brand is on prominent display.
Personalise invitations to encourage employees to attend group meetings.
Ensure you have a presentation to maximise the impact at a group meeting.