In continuing my analysis of the proposals for the Individual Pension Account, I would like to turn my attention to the section of the Treasury paper explaining the nuts and bolts of the new vehicle.
This section of the paper plays a key part in reinforcing the non-uniqueness of the IPA. It is clearly spelled out that it will be a “straightforward, flexible and transparent means of investing pension savings”.
The IPA will be a contractual arrangement like the Isa. The investor will contract with an IPA manager, who will manage but not be the legal owner of the underlying investments.
The IPA cannot reside alone, so to speak. It has to sit inside a defined-contribution pension arrangement. Usually, this will have been established by trust or deed poll. It will be the trustees or scheme managers who will be the legal owners of the IPA investments, with the investor as the beneficial owner.
The list of permitted investments in the IPA will be greatly encouraging to a wide range of fund management groups. It includes:
Units in an authorised unit trust.
Shares in an authorised open-ended investment company.
Shares or units in any equivalent collective investment fund established in a European Economic Area country to which the Ucits directive applies.
Shares in an investment trust company that is funded by debt of no more than 50 per cent of its assets, that is, its gearing is no more than 50 per cent of the fund's value.
Shares in any equivalent and similarly geared EEA investment company.
Securities in UK or other EEA government debt, for example, gilts.
To call the IPA a “structure” is, I think, stretching it a bit far based on what we are told in the paper. As has been stated, the IPA consists of a contractual arrangement – not unlike a nomineeship – under which an IPA manager manages investments on behalf of the investor on a contractual basis. The real structure exists in the form of the outer shell of the appropriate pension documentation – usually but not always a trust.
Of course, work needs to be done to establish the precise way in which the contract with the IPA manager should be evidenced. It will also be interesting to see if funds offer special IPA units or shares to reflect the lower charges demanded by stakeholder plans, the different taxation basis and lack of stamp duty reserve tax.
Clearly, most fund management groups will be eligible to be IPA managers but it will be interesting to see if, for example, a Luxemburg-based provider of Ucits funds could be an IPA manager. One could imagine also that some advisers would like to be IPA managers to offer, say, managed or self-select IPAs.
It would seem from the Treasury paper that the authorities are likely to be quite relaxed about this.
Easy and low-cost movement of the IPA between scheme structures – for example, personal pension to personal pension, stakeholder to stakeholder, stakeholder to personal pension or stakeholder to occupation pension – is a key objective for the IPA. This will be a function of pricing/charging both on exit and entry.
The transferee scheme could hold and/or add to the units held in the original IPA or not be prepared to accept the IPA units. In the latter case, the investor could leave them where they are or cash them in and buy new IPA units.
The key to making this work in a way beneficial to the investor will be to minimise charges. It is clear that a new IPA manager will not be compelled to accept the transfer of funds from an existing IPA but there will be no regulatory impediment to doing so.
A transfer of assets in specie can also be made between IPA managers, for example, the underlying shares could be transferred from one IPA manager to the other if a transfer of the units is unacceptable.
All in all, as the IPA can only exist within a pension plan, it will be important to consider the transfer rules for IPAs and the pension arrangements in question along with the costs of the whole operation in order to determine the extent to which the Government's objectives of easy, low-cost transfers can be achieved.
Changing the constitution of the investments underlying an IPA will be possible as determined by the terms of the IPA, that is:
At the discretion of the IPA manager (a kind of managed fund).
Saver chooses from a menu set by the IPA manager.
Saver chooses with no restriction. This offers the potential for a highly personalised IPA. This may be very attractive for some investors. It is analogous to self-administration but with slightly less choice.