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Same product, different name

The UK pension market is about to change substantially. Indeed, I am fairly sure we are about to witness a genuine structural change in both the focus of the market and the nature of products.

People have made such predictions before, I know, most notably in the mid to late 1980s with the coming of the (then) new personal pensions. At the time of the 1985 Green Paper and the period of consultation following it, many commentators and industry bodies came out strongly in favour of more weight being given to emp loyer-based pensions than to individual pensions.

The thought was that, historically, the best pensions that had been produced in the UK had come about where employers had been actively involved, in particular, where they had been contributing towards their employees&#39 pension savings. By 1985, there had been almost 30 years of experience to back up such claims.

The modern era of pensions had effectively started with the 1956 Act which spawned the enormously important occupational scheme sector and simultaneously established a separate environment to support individual pensions, which were then known as retirement annuity contracts.

This dual system survives almost intact today although it has had numerous (some would say countless) embellishments since, so as to make it virtually recognisable as such. But, the underlying structure is there if you look for it.

In the 1985 to 1988 period, I was in the camp that favoured a general push towards emp loyer-sponsored pension sch emes and away from individual pension arrangements, the two big topics of the day.

The main arguments we used in those days in favour of this approach were the econ omies of scale provided by the method of group distribution and the severely restricted market that could bear the costs of individual distribution. It seemed highly unlikely that individual pensions would ever break out of their erstwhile natural marketplace and spread to less affluent people than retirement annuity contracts had done.

In addition, the Serps scheme, which had been set up in 1978, was itself structured in such a way as to mimic the benefit structure of the traditional occupational schemes. Many of us regarded it, in effect, as an occupational pension scheme for those employees who were denied access to such arrangements through their employment.

A strengthening of the Serps scheme together with a reaffirmation of Government backing for good occupat ional schemes, and leaving individual pensions to their natural markets of the self-employed and AVC savers&#39 would, we argued, have consolidated all that was strong in the UK pension experience.

It would also have established a solid foundation for future pension growth. Had it happened that way, we would, by now at the dawn of this new century, already be reaping the substantial benefits such an approach would have produced. But it did not, and we are not.

In the event, the opportunities that existed in those days were foregone in the pursuit of a policy which was almost the complete opposite. Serps was reduced both in value and in scope. Occupational pensions were weakened, not strengthened, in particular by going along with the crazy notion that individual choice was paramount and allowing employees to leave or not bother to join company pension schemes.

The focus instead was put into the individual distribution of the (then) proposed “port able” pensions. Now, as it turned out, the portable pension idea gradually mutated into the “personal” pension which was itself nothing more than a rehash of the old retirement annuity contract, already by then 30 years old and showing its age.

Personal pensions were no more portable than retirement annuity contracts had been and they were not portable at all.

We know all this and what happened as a result is already a part of pension folklore. This time, we are told, everything will be different.

Well, strangely enough, I agree it will be different this time around alth ough not for the reasons Government ministers and legislators think.

On the face of it, this current set of pension “reforms” is much like the stuff we have become used to.

The “radical” stakeholder pension turns out after all to be nothing more than a rehash of the existing personal pension. Indeed it is a personal pension, nothing more, still based on the chassis of the outmoded and ant ique retirement annuity contract nearly 50 years on.

It has limitations imposed on it which are intended to make it defy the laws of financial gravity and stop the true costs of individual distribution falling on consumers. Some people think this might work, some do not, but the fact is we do not know at this stage. If it does fail, though, the consequences could be unhelpful, not to mention unpleasant. It is possible that the individual pension markets could simply come crashing down. I do hope not but would not bet either way at this stage.

Serps is being further deg raded, this time mutating into something called S2P which looks to be nothing more than a flat-rate top-up to the good old old-age pension. It all looks depressingly similar. The same old stuff, the same old tired approach and with the addition of enormous additional complexities.

But there is a bright spot. One so bright that I think it is significant. In the middle of all this muddle and red tape, one thing stands out – employers will become involved by law.

The pension solutions that employers will need to put in place to comply with these new laws will be as many and as varied as the number of employers themselves.

Put simply, every company is different, every workforce is different, and every potential solution will be different. It is not merely a matter of putting in place group stakeholder arrangements to mop up any relevant employees. The fact that relevant employees exist could affect the status of other employees in company-sponsored pension arrangements.

This simple fact, and the likely impact of regulatory edicts such as the recently published RN53, lead me to one inescapable conclusion – employers will require advice-driven solutions to enable them to comply with the law.

The only realistic distribution channel for these new pension realities, because of the complexities and the need for compliance with regulations, is that of the independent financial advisers.

There will be a swing to emp loyer-based solutions. Employers will have to get involved in pension provision whether they like it or not. IFAs are the only people likely to be able to distribute employer solutions in the volumes required in the timescales that have been set.


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