Wafer-thin margins will be the dominant characteristic of the stakeholder market and learning how to operate within them will be our biggest challenge.
While the group market will offer helpful economies of scale, there will still be customers seeking help with their pensions on an individual basis because they do not fall easily into any particular group arrangement. In handling them profitably, the challenge of thin margins is particularly acute.
For money, read time. With the available time severely limited, it makes business sense to develop alternative strategies for remote customer transactions so that the amount of true “advice time” that we can afford under stakeholder is spent in front of clients with more complex financial planning needs.
Worthwhile time savings can be made by offlining some of the traditional financial adviser activities to third parties. With a little creative thinking, activities can be re-routed to either lesser qualified staff within the brokerage or even the free services offered by outside bodies. This will become an important trend as the future pension market evolves.
It is my belief that most people now know they need to save for retirement, so advisers should not need to be the customer's conscience any longer. There is already plenty of media coverage about the need to save for retirement and it is starting to creep into the sort of conversations that friends have with each other.This will shortly be backed up by the Government's new pension forecasting service, which has reached blueprint stage.
We should not need to tell customers how much to save. A recent survey has confirmed that people feel they will need around 70 per cent of their pre-retirement income as a pension and no more than a simple ready reckoner is required to turn that into a monthly contribution. There are some nice ones on the internet.
Neither should we have to tell a customer how a simple pension works. Now that stakeholder has made pensions simple, a direct offer or category C advertisement can contain everything needed in a very readable and approachable format.
The decision tree concept is far from perfect yet but, assuming that the bugs can be shaken from the tree, we will have a simple Government- endorsed tool that will tell a customer whether or not a stakeholder pension is the right route for them.
All the above can be done without needing a fully qualified adviser to spend any time with customers. But because human warmth and reassurance is important, we must not assume that it can all be done using remote media such as the internet.
Personal callers to the office can be handled initially by an NVQ-trained receptionist, pointing the customer to the relevant material. Mailings and internet sites need to be backed up, perhaps initially with a phone call for hand-holding. Many of the phone calls, such as enquiries about decision trees, will not require fully licensed staff so the call centre can be populated by staff with a range of professional qualifications.
Hopefully, an approach like this will sift customer enquiries and save advice time so that there is still some affordable time left for helping customers with real financial planning.
In many ways, this is the most interesting part of the job when it comes to helping people to arrange their pension. Stakeholder pensions certainly bring a range of issues the financial planner can discuss with either new or potential clients and demonstrate added value. The new tax rules will require detailed interpretation for the more complex client situations. For middle-income clients in an occupational pension, the new concurrency rules open additional options for additional voluntary contributions.
For high-net-worth clients, where maximising the pen-sion contribution to minimise the tax burden is a key aim, there are plenty of opportunities to add value to a client relationship.
Will the directors of a small company be better off leaving their existing arrangement as it is or should they switch it across to the new tax framework that will apply not only to stakeholder but also to all new money-purchase schemes?
For the self-employed and others with personal pensions, advice will be needed on changes to the rules for carry- forward and carryback. Under the new rules, which come in from April 6, 2001, a contribution being carried back to the previous tax year must be paid no later than January 31 in the following tax year.
It is important to note that the election to carry back a contribution must now be made no later than the date the contribution is paid. This area really is a minefield for pension amateurs and customers would be foolhardy not to take proper professional advice.
Carry-forward is, of course, being abolished from April 6, 2001 but clients in the know can still make use of it until January 31, 2002.
This is because a contribution paid to a personal pension plan before then can be carried back to the 2000/2001 tax year, where it can be justified on previously unused reliefs carried forward to that year. Indeed, until January 31, 2002, it will still be possible to mop up unused reliefs right back to April 6, 1994.
Still looking at high-net- worth clients, the question of self-investment merits careful thought. Most stakeholders will offer at best the same range of funds that providers' personal pensions do at present.
The self-invested personal pension should therefore continue as a strong offering to clients. There may however be an intermediate position, with the Treasury's new baby, the individual pensions account, offering choice from an extremely wide range of collective investment funds.
Thinking ahead to potential customer meetings, one of the most natural questions that the introduction of stakeholder pensions will bring is: “Should I transfer my existing pension to stakeholder or would I be better off leaving it where it is?” Just the type of question that sorts the serious financial planners from the gypsy crystal ball fortune tellers.
There are two approaches to this question and both need to be discussed with the client. The first is a straight piece of actuarial analysis. The effect of new and old charging structures can be compared by generating benefit projections using a common assumption for investment returns.
By using a range of projection periods, it is possible to see whether the predicted improvements on upgrade to stakeholder are, in fact, dependent upon maintaining the contract to maturity and whether they evaporate, or alternatively increase, if the contract is made paid up in the future or if early retirement is taken. The necessary tools for this analysis can be carried easily on an adviser's laptop.
The second approach requires consideration of the client's past. If the existing arrangement is a pre-royal assent personal pension or a retirement annuity contract, then there are benefits of old tax regimes to be preserved or lost. Perhaps there are investment options, such as guaranteed rates of fund growth on old with-profits funds, guaranteed annuity options or other miscellaneous guarantees that would be lost on transfer.
Insurers have a long record of giving guarantees that seemed almost worthless at the time of issue but which may now have come into their own.
All in all, there will be no shortage of things to discuss with individual clients but a potential shortage of affordable time to do it in.
Only advisers that allocate their time carefully will prosper. Those that spend time on tasks that could be offloaded to others will have insufficient time to spend on clients that really do need that personal and professional touch.
Pensions strategy director,
Legal & General