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.