Virgin Direct's announcement of its impending individual pension account launch deserves closer inspection.
The company is incorporating IPAs into its pension wrapper but the IPA will be the fund engine sitting within the pension and will not be taking a more prominent role in the scheme.
Most life offices struggle to see what advantages IPAs bring over stakeholder but Virgin says it will automatically be transferring all its pension plans to IPAs and stakeholder for April 6.
Virgin's pension schemes already operate within a 1 per cent management charge and, like many life offices planning similar operations, it makes sense to change all the schemes to stakeholder. But Virgin is one of the first providers to transfer its pensions to IPAs as well.
Head of corporate affairs Martin Campbell says Virgin already pays the stamp duty charge for customers. In effect, it has been taking advantage of the benefits of the IPA environment before it was brought in.
Virgin says that even after the pensions are transferred to IPAs, customers will not notice any difference as they will continue to be free from stamp duty.
But if Virgin is no longer paying stamp duty, surely this is a benefit for the provider rather than the policyholder?
Campbell says although there is a financial advantage, the effect of not paying stamp duty will not be huge. The pension, launched in 1996, is a relatively new portfolio, with few transfers. Most of the policyholders are young, which means very few would incur stamp duty charges.
He says: “We would notice the difference in 25 years when our customers are approaching retirement and buying annuities.”
As a unit trust pension provider, other life offices can see how Virgin will benefit from using IPAs, yet no-one seems to be following the move – even life offices with an asset management arm.
Friends Provident head of stakeholder marketing Paul Stanbridge says: “If a provider is using unit trusts rather than its own funds, then I can see why it would make sense for them to use IPAs but most providers cannot really see what they would bring to the party.
“Friends Ivory & Sime, our own fund management operation, does not have any immediate plans to go into the market. We would team up if we felt there was a significant piece of the market that we do not already have access to.”
But the Virgin IPA will be used as part of the behind-the-scenes mechanics of the pension. Virgin says consumers will see little change and its back-office systems have needed little alteration.
Campbell says: “The things we have had to tweak to operate in a stakeholder and IPA environment have been minor because we were operating within those parameters anyway.”
Although one of the main features of IPAs is portability, this is an aspect Virgin will not be taking up at present.Campbell says the portability of IPAs is something for the future rather than now, pointing to the costs involved in having someone else's funds under stakeholder.
As Virgin is using just the mechanics of an IPA, it is not being marketed as an IPA product. Campbell says, as far as the market is concerned, consumers want to buy a pension and the concept of stakeholder is just starting to sink into public consciousness. Anything else could cause confusion.
Campbell says people do not want to know the internal mechanics of a pension just as they do not want to know the details of how a car engine works. They are buying the overall pension package, not stakeholder or IPA.
However, the provider is sending out information packs to existing policyholders to explain why the policies are being transferred and the impact of these changes.
Campbell says: “Stakeholder and IPAs are getting a lot of coverage in the financial press and we want to give our customers the bottom line of what this means.
“We will tell them there is no need for concern as the product is better than before and we want to keep our customers informed of the key developments going on but in a straightforward way with language that is clear rather than using insurance jargon.”
One of the big problems that is standing in the way of IPAs is that the legislation has not been finalised. Campbell does not believe it is going to be a problem for Virgin. He says the product is 99 per cent finished and they are just waiting for the final details to be finalised, which should happen within a matter of weeks. Other product providers are not quite as confident.
Legal & General pensions strategy director Adrian Boulding says providers cannot decide if they should be in a life insurance fund or an IPA until the full details are announced.
But from the current information he says: “IPAs still seem to have a slight disadvantage as life insurance still has some tax efficiencies to IPAs and so providers with a choice will be offering pensions through life insurance rather than their investment arm.”
The Treasury is in the process of resolving the issues highlighted during the consultation process.
But Scottish Equitable pensions development manager Steven Cameron says the Treasury admits they might not all be answered by the launch date and subsequent changes would be made retrospectively.
He says: “I am surprised a pension provider would take such a risk of committing to IPAs without all the details.”
IPAs may be hitting the market now, but still not in the package the Treasury expected. Virgin's vehicle is just using the mechanics of IPA and most life offices are waiting to see is there is a demand for IPAs before designing a product of their own.