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Incentive schemes

Legal & General and Norwich Union are calling for a radical shake-up in the pension market but their approaches will prevent them from taking a unified stance.

Both life offices believe an incentive system to encourage individuals and employers to start pension savings en masse is required but they clash on the level of advice needed.

Legal & General pensions strategy director Adrian Boulding believes the Government needs to act quickly to have any chance of reducing the nation&#39s state pension reliance and preventing stakeholder from becoming a high-profile white elephant.

Boulding thinks a four-point plan could subdue the call to make employer contributions into designated stakeholder schemes compulsory.

He is asking the Government to provide a two-year inc-entive of 50p for each £1 invested up to a limit of £100 a month. This would be instead of the initial tax relief.

In addition, employers will be encouraged to match this incentive rate permanently by making it the minimum requirement for a new accreditation scheme, possibly through the Department for Work and Pensions.

Legal & General has reiterated its idea of lightening the FSA&#39s fact-finding burden on stakeholder plans to limited disclosure and allowing emp-loyers to recommend their stakeholder scheme.

Boulding says: “This would help advisers to make stakeholder profitable to them within the 1 per cent charge cap.”

Both companies also claim to be the first to call for new incentives although L&G has released detailed proposals to get the debate going. NU pensions director Jerry Barnfield supports L&G&#39s incentive in general but he insists that another factor is removing the disincentives. This means that, without factoring in a reasonable cost for financial advice above the 1 per cent cap, the mass market will not be reached.

Barnfield says: “The biggest need is to reach the basicrate taxpaying market. This means getting advice to the right places. To do so, advice costs must be factored in at a realistic level.”

But Boulding thinks an increase in charging compulsion should be avoided. He says: “If the Government is smarter in the way it supports pensions, we feel that the calls for drastic action will not be needed. If the Government creates an initial momentum with a limited offer of a cash incentive together with employer contributions being induced, the workplace opinion should turn in favour of pensions. This should then continue with the accreditation encouraging employer contributions to keep the momentum going.”

L&G expects a Government incentive could parallel the take-up success of the 1988 contracting-out incentive of an extra 2 per cent for five-years.

However, Standard Life senior technical manager John Lawson believes that any incentive must cover personal pensions, otherwise the admin cost to the industry of covering all the incited switches will negate the advantage of the extra premiums.

Lawson says final-salary schemes should also be included in any incentives. “The cost to the state of such an increase, which is effectively an 11 per cent increase on basic-rate tax relief, will not be afforded when there is the restructuring of the NHS, education system and an ailing transport network to be considered,” he says.

Boulding thinks his proposals are affordable, saying the reduction in charges as a means by which contribution levels can be significantly reduced while still matching benefits with old personal pensions. This way, he believes the Government should notice a decrease in tax relief and that this and the planned increase to the current £9.8bn tax relief budget that would occur if stakeholder is successful should cover the extra costs.

He says. “We believe there has been an overlooked tax relief saving due to the charging cap. If this is temporarily used to promote the scheme, the Government, which is struggling to spend its set budgets, may at least solve one long-term issue.”

Friends Provident head of stakeholder strategy Paul Stanbridge believes the incentives may help greatly but the key to increasing take-up is employer contributions. He says: “Stakeholder will not hit target if it remains solely voluntary.” The figures bear him out.

But the Department for Work and Pensions believes no further action is needed at present.

A spokeswoman says: “There are no plans for any changes. There has been an increase in pension premiums and what must be realised is that stakeholder is one cog in the wheel. We want people to think about their pension and to provide for their futures if they have the ability to do so. Whether that is with a stakeholder or not does not matter.”

ABI research shows a savings gap of £27bn, which is predicted to grow at up to £5bn a year. Both NU and L&G agree that a new message needs to come from the Government.

Boulding talks of the three-step process to produce take-up results – awareness, comprehension and conviction. L&G&#39s figures show awareness is good, with 70 per cent of the public knowing that stakeholder is a pension.

It says the next step is for more detailed ads to raise comprehension, with the proposed incentives helping to cement public conviction.

Similarly, Barnfield believes the Government&#39s ad scheme must also become more targeted. He says: “At present, the message is too vague. The message must be that people need to start saving for retirement, not just if they want to. There are now more options.”

So, a rethink may be necessary but to what extent?

Chase de Vere savings and investment manager Anna Bowes sees a real danger in any calls to relax the rules on giving advice. It is conceded by some that in certain situations it may be acceptable to lighten the advice burden such as L&G&#39s example of presentations to big companies where it is unrealistic to expect advisers to sit for an hour with each employee.

But Bowes insists: “You cannot get away from the adv-antage of knowing your client in giving proper advice.”


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