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Executive decisions

As everyone in the industry is clearly aware, the 1 per cent regime has had a massive effect on pension products in the group and personal market. The pressure of the low-charging environment is fast taking hold on the executive pension market as well.

But how many providers of executive personal pensions meet the 1 per cent criteria? Looking at the O&M Pensions Profiler system, a product-comparison tool available to IFAs in the UK, I searched for EPP products that have the following features:

A 1 per cent annual management charge.

Two free fund switches a year.

Allocation rates of at least 90 per cent.

Penalty-free transfer values.

Penalty-free early retirement.

No initial charge.

No initial or capital units.

Only seven of the 17 providers offering EPPs to IFAs in the UK can meet these criteria.

IFAs should ensure that the provider they are recommending is one of these seven and they should be thinking about reviewing all clients&#39 existing EPPs.

IFAs can add further value to their services by selecting a provider that offers internet access for scheme members.

Traditionally, EPPs have had expensive multiple charging structures, including initial units, bid/ offer spreads or high ann-ual management charges. This is mainly due to the fact that EPPs have in the past been solely invested in the funds of the product provider and have been subject to the contract&#39s terms and conditions.

It has often been the case with EPPs that it is too expensive to escape multiple charges if the performance dips.

This has continued because EPPs have not been subject to the Government&#39s Cat standards as they fall under the occupational pension scheme rules so most providers have not been forced to re-price their EPP products.

A perverse situation has arisen where a £100 a month individual personal pension can be charged at an annual management charge of, for example, 0.7 per cent with no other charges, but a £1,000 a month EPP can be subject to a variety of charges, all at higher levels.

It is crucial that IFAs reassess whether current EPPs offer their clients good value or not, paying particular attention to products with some of the older charging structures, especially those in force for some time.

An analysis to compare the existing scheme benefits against a transfer to a new EPP is highly recommended as products in the 1 per cent regime do not have policy fees, lower than 100 per cent allocation rates and bid/offer spreads.

Such an analysis would show whether the existing scheme provides better returns than a new one would – or vice versa.

Looking at company schemes more generally, a situation could arise where a 1 per cent group pension product has been offered to a workforce but the directors of the company are still with an old-style EPP.

This could result in the majority of staff on the new group product getting a better rate than the directors. There is an opportunity for competing IFAs to recommend contracts and new pension solutions that are more competitive to those directors and key staff.

IFAs could also benefit from recommending that any new product has fund tiering, giving the client a lower charge for funds.

Another option that cannot be ignored is that most EPP policyholders are themselves directors who probably have some form of sophisticated investment portfolio that may include products bought and administered online.

Many providers are offering internet access to their EPP policyholders through the systems and sites built for the 1 per cent regime. IFAs should look for providers that have the ability not only to inform but also to interact and transact.

There is the opportunity to cross-sell other products that may not have been thought of at the original time of advice being given to EPP clients. Executive income protection can be used as a way of providing a waiver benefit to the EPP client.

Most directors would want to look at a higher rate of critical-illness cover than that offered to their employees. Seven times salary is available in some cases.

Finally, when IFAs are reviewing options available to their clients they should remember that some customers may want to increase their premiums and spread the investment risks by investing in a new provider using the existing trust deed.

IFAs interested in making use of this facility should check with their existing providers that the scheme rules allow it.


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