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Fund firms put new life in pensions

One of the points identified in the Sandler report is that the pension tax regime creates artificial barriers to non-life insurance providers, such as specialist investment houses.

The fiscal handicap pinpointed by Sandler is an anomaly that the Individual Pension Account was supposed to address but clearly has not. Since its introduction in April 2001, there has been no flood, not even a trickle, of companies to launch this type of product.

The reasons given for this failure include the complexity involved in fitting IPAs into established pension structures and the way in which tax relief is administered – this is more burdensome for IPAs than for pensions managed within a life office environment.

Life insurers also benefit from a VAT exemption for management fees that is not currently available on such charges levied by other companies. Sandler recommends that the Government consider introducing the measures needed to enable pension providers of all kinds to compete against each other on a level playing field.

But the leading specialist investment houses are ahead of the game. They have managed to circumvent the perceived fiscal disadvantages by setting up their own life insurance subsidiaries through which to channel pension business. Sandler recognises that they have done this but questions the need to take such drastic action.

Some major global asset management players are rapidly building up defined-contribution business, as the swing from defined benefit shows no sign of losing momentum. Their DC offerings include employer-sponsored pension provision of all the main kinds – occupational schemes (including AVCs), group personal pensions and stakeholder.

These are now available to the medium-sized businesses that are so often the clients of IFAs. Employers with workforces numbering in the 100 to 500 range can have access to the same or similar resources and services as their major multinational counterparts.

A multi-manager facility enables members to diversify their investment portfolio at three levels. This should give them the opportunity to reduce risk and enhance potential returns, depending on factors such as the degree of correlation between the asset classes selected and research resources available to and the skills of the different fund managers.

The top tier gives access to the main asset classes of equities, property, bonds and cash. Level two enables individuals to choose between the various investment styles (growth, value, tracker, small cap and so on). The third level allows them to select from a wide range of funds available. These include those managed by external investment houses recognised for their expertise in certain specialist sectors. The range should contain a socially responsible fund run by a dedicated team.

Members normally make their own investment decisions but do not do this in a vacuum. Instead, the emphasis is on giving them the knowledge and information they need to make informed choices – on whether to enroll, how much to contribute and into which funds, when to switch between them and so on. Some IFAs may have misgivings about such steps being taken without one-to-one financial advice but experience with 401(k) plans in the US tells us that these procedures really can work.

A variety of media are used to communicate the information on which this decision making is based. Workplace presentations may be fairly new in the UK but have been an established part of the US employer-sponsored pension scene for years. Other communication methods are traditional paper-based material, the dedicated call centre and scheme website.

The last of these comes with the advantages of accessibility, immediacy, low cost and direct integration with the underlying systems administering the scheme.

As pension providers, the specialist investment houses are generally free from the problems associated with legacy systems from the past. In the words of Sandler, these “act as an inhibitor to successful consolidation of the industry”.

These fund management houses can use their life insurance subsidiaries to offer pension products of a very different kind. Trustee investment plans enable SSAS and Sipp investors to invest in unit trusts and Oeics indirectly, through the medium of a life company policy, rather than directly and avoid the tax disadvantages identified by Sandler.

The target market are the high-net-worth individuals who are so typically the clients of IFAs – shareholding directors of private companies and others who have accumulated pension funds measured in the hundreds of thousands of pounds or even more.

These SSAS and Sipp plans are competitively and transparently priced and IFAs can choose how they are remunerated for their professional advice and other services. Some may prefer initial plus renewal commission. Some, who run a fee-based practice, may opt for a nil commission/enhanced unit allocation basis.

The Inland Revenue is soon to issue the report on its review into the tax simplification of pensions. Will it recommend ways of levelling the playing field between the two types of providers and their products? We will find out soon enough.


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White paper — recording sickness absence

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