At the time of release of the latest consultation document on the Individual Pension Account, I was in the land of the 401(k) queuing for the Buzz Lightyear ride in Disney's Magic Kingdom. I was subjected to some spectacular spinning before leaving more than a little disorientated. The Buzz Lightyear ride had its moments, too.
The document clarifies a number of issues. In particular, the IPA is not a pension scheme in its own right but a wrapper which sits within a pension scheme to hold the underlying investments.
There are options given at both scheme and IPA manager level regarding how flexible an approach to take. Unfortunately, the huge range of possibilities is likely to make pensions even more bewildering for the average investor.
The pension provider or occupational scheme may choose not to offer investment through IPAs. Alternatively, it can decide to offer access to a single IPA manager, a limited range of IPA managers or any IPA manager in the market.
There will be additional costs involved in offering the IPA facility, for example, the scheme must be able to interface with the IPA manager's systems to obtain information on unit prices. The extra costs will inevitably increase with the number of IPA managers the scheme is prepared to deal with.
As a result, many schemes, particularly stakeholder with its cap on charges, will simply not offer IPA unless avoiding stamp duty reserve tax is an issue. Those which do – and I suspect this group will be primarily fund management companies without captive life offices – will favour offering access to a single IPA manager, no doubt linked to their own organisation.
The IPA manager also has the choice to offer access to the qualifying collective funds offered by a single fund management company, a limited range of companies or any company which the investor may choose.
It is not clear if IPA managers have the right to refuse access to gilts. I suspect many IPA managers will restrict the choice to gilts plus the collective funds of their associated fund manager or, at best, to a small number of fund managers.
If the above predictions are correct, will the IPA still deliver the benefits of portability the Treasury claims? If an individual with scheme or provider A which uses IPA manager A then moves to scheme or provider B which uses IPA manager B, will the individual be able to take their IPA with them?
Well, not directly, because scheme or provider B does not deal with IPA manager A. The document suggests a number of other indirect ways to effect this transfer:
IPA manager B may be prepared to accept the units in the underlying collective funds which IPA manager A invested in. But, if, as suggested above, each IPA manager tends to offer access to a limited range of the collective funds, then, in the majority of cases, the underlying collective funds will not match and this type of transfer will not be available.
IPA manager B may be prepared to accept an in specie transfer of equities in which IPA manager A's collective funds are invested. Surely this is a non-starter for both IPA managers?
The only remaining possibility is that IPA manager B receives a transfer of the cash amount of the original IPA fund. This is no different from what happens currently when transferring between schemes. The IPA offers no added benefit of portability.
As mentioned above, and contrary to the claims in the document, I believe IPAs will be particularly unsuitable for stakeholder schemes in light of the 1 per cent cap.
The document states: “It will not be difficult for IPA managers to find investment funds able to offer charging structures within the stakeholder limits.” Yes, there are some collective funds which charge 1 per cent or less but this is not the issue. Stakeholder schemes must meet many other costs out of the 1 per cent. The investment management costs are a relatively minor aspect.
To be at all feasible within stakeholder, IPA managers may have to commit to a cap on the investment charges of perhaps as low as 0.3 per cent. To put it mildly, this restricts those collective funds which such IPAs can use.
It may well be that the IPA finds a niche market within which it will thrive. However, this is most unlikely to be within stakeholder. In practice, those schemes and providers which do use the IPA facility are unlikely to offer the extensive choice of investments the document envisages. “To infinity and beyond”? I doubt it.