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Government’s plan could cost billions

The Government’s controversial proposals to convert contract schemes to trust based schemes to “protect” existing savings could cost £4bn, according to industry estimates.

A recent meeting between pensions minister James Purnell and the ABI, notes of which have been seen by Money Marketing, discussed the threat to existing schemes posed by the European Distance Marketing Directive.

The directive effectively prevents contract based schemes from auto-enrolling employees, a key requirement for schemes which want to operate alongside personal accounts.

The meeting discussed introducing streamlined joining techniques but Purnell also proposed switching schemes to DMD compliant trust based schemes.

This radical proposal has alarmed many in the industry, with Standard Life head of pensions policy John Lawson arguing Purnell’s proposal could cost approximately £4bn in set up costs, transfer costs, fees and commission.

The ABI says the DWP never intended this as a genuine option. But the DWP refuses to corroborate this and merely restates that it is exploring a range of proposals with the ABI.

Either way Lawson, while understanding that the DWP needs to consider a range of options, wishes this idea remained “unthought”. He says there are far easier ways to get around the DMD problem without huge disruption and costs for existing schemes.

He says the simple solution is to pass legislation that overrides the employee’s contract of employment (but does not override the DMD).

So, regardless of what it says in the contract of employment, an employee working for an employer with a good exempt contract-based scheme would join the scheme as a condition of the contract of employment after say 14 days employment, during which they would receive full details of the GPP or group stakeholder contract that they were about to enter. They would then have 30 days full cancellation rights.

Lawson points out legislation that overrides contracts of employment is fairly common – age discrimination and the minimum wage being just two examples.

In a similar vein Aegon says the Government’s suggestion of converting contract-based schemes into trust-based is unnecessary as a solution already exists within the industry.

It says streamlined joining processes (where the member only has to sign a piece of paper to say they want to join then everything else is done automatically) can ensure take up rates in GPPs of 90 per cent.

There should also be a clear and workable exemption test implemented soon to give employers the maximum amount of time to prepare. While Aegon says the ideal would be to see a change to the way the DMD is interpreted into UK legislation this is unlikely to be achieved in the short term so allowing GPPs with streamlined joining process to qualify for exemption from PAs is a ready made simple interim step.

Elsewhere Hargreaves Lansdown is urging the Government to make the open market option the default option for annuity sales to stop customers ending up in second rate products.

In its response to the Government’s OMO review Hargreaves calls for zero tolerance on transfer delays with a system of FSA fines for providers.

It says too many customers are ending up through inertia in poor annuities with their existing provider.

It says investors should be steered to the OMO as their default option, with their existing insurer having to compete for the annuity business on the open market.

Although it is not difficult to spot why Hargreaves would find a OMO default option appealing from a business perspective, there is certainly some merit to the argument. It is a disgrace that customers are not being encouraged to take more active decisions with money they have saved over the years.

But some commentators will argue the OMO default option is impractical, with ABI figures showing 40 per cent of annuities bought last year were worth less than £10,000. Most providers won’t exactly be queuing up to service these pots.

As such, Origen’s head of annuities Nick Flynn supports Hargreaves Lansdown’s calls for a default OMO, but says the best it may hope for is some kind of compromise which will still ensure savers exercise more choice over what they do with their savings.

This can only be good for the consumer and good for the adviser.

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