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Top advice needed to give IPAs a fighting chance

The IPA is here, or is it? The continuing publicity surrounding stakeholder pensions and the new defined-contribution tax regime has left the Treasury&#39s fledgling concept of a year ago stranded on the touchline as mainstream support for traditional pension vehicles thunders onto the pitch.

What is an Individual Pensions Account?

The answer is not so much what it is as where is it?

In the strictest sense the IPA is not a product but rather an investment vehicle – a wrapper within which a number of different investment products can shelter while attracting tax relief on the contributions made to them in exactly the same way as contributions to pension policies held for stakeholder.

How do I get one?

They will be available to operate under any defined contribution arrangement (stake- holder, Cimps, personal pensions, FSAVCs, etc.)

Importantly, it will be possible to operate one or more IPAs alongside investment in traditional pension funds. It may even be the case that IPAs are offered as an additional option alongside conventional funds. This brings with it a host of interesting advice issues which will need to be tackled head on.

Basically, the IPA offers the opportunity for product providers to extend the range of investment vehicles available to IFAs&#39 clients in the stakeholder marketplace.

How successfully this challenge will be met will depend to a large extent on the ability of alternative investment vehicles to meet the multiple requirements of a maximum one per cent charge, transfer without penalty, remuneration to advisers and profit to the provider.

The range of investments which can be held under an IPA include: unit trusts, Oeics, Ucits (in any European Economic Area country), investment trusts (where the gearing does not exceed 50 per cent), shares in either the UK or any EEA country, and gilts or government loan stock from the UK or an EEA coun
try.

The diversity of choice means advice will prove critical. Few clients have either the skill or knowledge to construct diversified portfolios and even those that do will often seek confirmation of their choice from an adviser.

Herein lies the conundrum: The ownership of assets under an IPA is clear. The assets are owned by the trustees or scheme managers of the stakeholder scheme under which the IPA sits. However, the IPA manager could be a totally separate provider from the provider of the stakeholder scheme and the vehicles in which the IPA manager invests could potentially be managed by separate investment houses or retail product providers.

So, while the IPA itself provides a simple solution for the consumer, namely, a single wrapper under which a diversified portfolio can be created, its underlying structure could involve significant tiers of management which present a challenge in terms of delivery in the 1 per cent world.

Failure to achieve cost-effective delivery of the IPA will squeeze the margin available to remunerate advisers and could leave the industry with a sophisticated product, which is not promoted unless a fee-based approach is taken.

IPAs could be bought but it is debatable whether or not they can be sold.

The situation facing IFAs is not a problem of product choice. The introduction of IPAs introduces yet another option for consumers into a marketplace that is already highly confusing. Choice, by its nature, provides opportunities for advice. That requirement is clear.

The question is one of time/reward. In many ways, the IPA situation has parallels with the service currently provided with great success by many advisers in the field of small self-administered schemes and self-invested personal pensions.

The concept of a bespoke managed portfolio is one which has proven highly successful with both high-net- worth and sophisticated investors alike.

The difference is that more scope for IFA remuneration exists in constructing such portfolios within the wrapper of a SSAS or Sipp and thus a significant amount of time can be spent on product selection, research, review, etc.

Where does this leave the IPA/stakeholder customer?

The consumer does not want endless choice. The consumer needs a profession-ally researched and selected range of top-performing investment vehicles that meet their risk profiles and longer-term objectives.

Whether this is achieved by means of a single fund or a selection of diverse investment media is not of great concern to the consumer, who only seeks reassurance that the strategy chosen has a better than reasonable chance of fulfilling their objectives.

If it is unlikely that an IPA within the 1 per cent world can provide sufficient product remuneration to enable ongoing research and review of investment funds by the adviser, will it fall to product providers to perform this function internally?

If IPAs can be established on a multi-manager approach, then they may have some chance of success. With the IPA provider providing a dedicated, benchmarked review process, encompassing hundreds (or thousands) of funds in order to provide a limited selection of bespoke, risk-graded, pension portfolios, the requirement for intensive review and research by the advisor is lessened. The multi-manager approach still requires review. It will need to deliver results in the same way as any managed approach. But it does offer access to an extensive market in a cost-effective manner. The problem is that the cost is too high.

Major pension players have accepted the challenge of providing fund management, admin services, systems support, marketing mat- erial and adviser remuneration within the scope of the 1 per cent charge cap for stakeholder.

Yet the irony is that the “new world” pension marketplace is following the rules of unit trust economics. There is little embedded value here. At the same time, there would appear to be few options for unit trust-based IPAs while the fund management charges of many funds still exceed the 1 per cent level.

If retail fund providers can meet that challenge and enable the multi-manager approach to deliver the goods to the consumer, IPAs have a fighting chance.

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