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Personal services

Standard Life marketing technical manager Andrew Tully examines if there is a role for IFAs to play in the proposed pension personal accounts

As A-Day changes slip into history, attention is turning to the important topic of personal accounts. These are the new retirement savings accounts that the Government is introducing from 2012 that will have a fundamental effect on the pension landscape in the UK. But what will the introduction of personal accounts mean for advisers?

Personal accounts propose a 4 per cent contribution from employees, an employer contribution of 3 per cent plus tax relief of 1 per cent. These payments are based on a band of earnings between 5,000 and 33,000 a year.

Employers will need to automatically enrol all staff over 22 into a personal account unless they already offer a sufficiently good scheme.

Employers that already have good schemes will face a choice when personal accounts come along. They could close their scheme and instead enrol everyone into personal accounts. Alternatively, if they decide to keep their own scheme open to new members, auto-enrolment means there is likely to be an increase in overall cost. To stay competitive, employers will need to look for ways to absorb or mitigate this additional cost. One possible consequence is that employers might reduce their payments – so-called levelling down.

At first glance, some research we carried out recently, along with some other providers and Deloitte, suggests levelling down is not a major issue, with only 8 per cent of employers saying they will reduce their payment level. But the much bigger consequence is that around 65 per cent of employers say they will close their scheme to new entrants.

Closing a scheme to new entrants does not constitute levelling down as existing members still benefit from higher employer payments. But given the frequency of staff turnover, there are likely to be few people left at the higher contribution level within 10 years.

A problem that employers might face with this strategy is that the existing scheme with higher payments is predominantly for older people while new employees, who one might expect to be young, are enrolled into personal accounts. This could result in age discrimination problems. The 65 per cent of employers that intend to close their schemes to new entrants will probably go one of two ways – level down to a payment rate above personal accounts or close the scheme completely.

Advisers specialising in the group market are a hardy bunch and the introduction of personal accounts is yet another challenge they will have to face. While the Government thinks there is no need for financial advisers to get involved in personal accounts, I would very much disagree. Based on some work we have done, there are a lot of people who would be better off saving in something other than personal accounts but who is going to tell them this?

In the run up to personal accounts, employers who have, or want to set up, group schemes will continue to need assistance. They will also need help in deciding how to cope with the introduction of personal accounts. But the Government seems hell bent on squeezing advisers out of the picture, except perhaps when people reach retirement.

The vibrant individual pension market is largely unaffected by personal accounts. Many high-net-worth individuals will continue to want the flexibility and greater control available through asset and tax management platforms such as self-invested personal pensions and wrap.

There are many benefits to using a Sipp as they provide increased choice in terms of investment strategy and retirement options. This is in contrast to personal accounts that are likely to have no more than six or eight fund choices. In a similar way, the burgeoning wrap market will continue to expand without paying much attention to personal accounts.

The retirement income market is another major area that advisers may want to get involved in. People who have built up reasonable funds in personal accounts and elsewhere will need retirement planning advice. The A-Day changes simplified payments into pensions but the retirement stage is more complex than ever before. The vast range of choices make advice a necessity.

Finally, the self-employed are ignored by personal accounts and will continue to need advice on the best home for their pension savings.

Mandatory employer contributions and auto-enrolment of employees will create millions of new savers. However, we should not kid ourselves that payments of 8 per cent on earnings between 5,000 and 33,000 will guarantee a comfortable retirement for all.

There will still be a major need for additional savings and protection on top of this default level, as well as products such as Sipp and wrap which give the flexibility and control many clients are looking for. Advisers have a big part to play in helping people understand this.

It is generally accepted that a great deal of what product providers record as new business is old pension arrangements simply being transferred and reconstructed.

Stockmarket analysts will eventually stop measuring the success or otherwise of a quoted product provider based on the level of their new business but will much more sensibly measure profitability instead.

But I digress. What I want to consider in this article are the reasons why pension consolidation is such a high-level activity and I will use as a case study a client I spent some time with this morning because he represents a perfect example of a client who can benefit from consolidation advice.

Paul is 48 and a company director. He has a budget from his employer of 10 per cent of his basic salary that can be invested in a pension plan of his choice. He also has five existing personal pensions accumulated as a result of different periods of employment including one which he has used to contract out of the state second pension. He has a total of just over 230,000 of paid-up personal pensions and, by his own admission, has no real understanding of what is happening in respect of the investment of his pension funds.

He receives one statement each year from each provider and they arrive at different points in the year. He can compare this year’s value against last year’s value but has no real reference point – what we might call a benchmark – to determine if performance has been good, bad or indifferent.

Historically, he chose either a with-profits fund or a managed fund, he and his employers paid their contributions to the plan and that was that. As Paul said: “If I had invested my own money in a savings or investment product, I would have paid much more attention to it.”

He has effectively ignored what is happening to his pension investments until now. Two of his with-profits plans have a reversionary bonus rate of zero and both of them have relatively small market value reduction penalties imposed if he tries to transfer his pension fund money elsewhere.

The asset class mixes within his managed funds bear little resemblance to the model we have created for him based on a thorough analysis of his attitude towards investment risk, reward and volatility.

So what are the advantages of consolidating his pension arrangements into one plan and directing future employer contributions into that plan? The first advantage is what I call information flow. Paul will receive quarterly valuation reports and commentary in respect of his consolidated plan. He will be kept up to date on the performance of his funds against established benchmarks and will be provided with advice and recommendations about his investments. At least once a year he will have a face-to-face-meeting with his adviser to review his pension investment portfolio thoroughly. One might of course question why this degree of information has not been provided by the existing product providers.

Paul will have a say in where his pension fund is invested. He will not be handing his contributions over to a faceless fund manager about which he knows very little but will instead be able to involve himself to whatever degree he wants in choosing the pension fund investments. If a particular investment opportunity arises, he may choose to use some of his fund to exploit it.

He will also have a better understanding of the ultimate benefits he is going to receive because his consolidated illustration of benefits each year will be much easier to understand than the combination of illustrations he currently receives. This will make pension contribution planning much easier as well.

This kind of activity is part of an overall trend we are witnessing to provide personal bespoke products and services to clients. I confidently predict that the future is in the hands of the intermediary who not only controls the client relationship but has a real hands-on role in product manufacturing.

The future for the conventional product provider does not look bright. The build-up phase of retirement savings will be taken away from them by the state. The bespoke delivery will be in the hands of the intermediary. It is therefore questionable what the role of the conventional product provider will be.

So far I have not mentioned product or price, have I? Not surprisingly, a self-invested personal pension is probably the most suitable product for Paul. Sipps are no longer the expensive product wrapper they once were and the entry level is significantly lower than the level of Paul’s available funds.

Yes, it will cost Paul to make these changes. He will have an exit penalty to pay on some of his existing plans and the costs of setting up his Sipp. He will also have my fees to pay.

But do not let us fall into the trap of the ill-informed commentator and focus solely on price. Let us do what sensible people do and focus on value for money. This is delivered through choice, control, information flow and advice. All these come at a price but most independent intermediaries know how to turn this price into real value for clients.

As a client said to me after three years of regular meetings and 12 valuations from his consolidated Sipp fund: “For the first time in my adult life, I now know what is going on in my pension fund.”

Now that is the real value of consolidation.

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