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Wandering through the personal pension maze

How do you deal with the employer who is paying over 3 per cent of salary into a personal pension of the individual employee&#39s choice? Is it worth the time spent trying to get confirmation from all the various pension providers about the exit penalties (a difficult task given that no one IFA will have authority to act as agent on all the policies)?

I find that employees in this type of arrangement are staunchly independent and are suspicious of financial advisers, who would be seen to be “muscling in” if they were asked to sign change of agency authorities for this purpose.

I have heard if/when the Government introduces compulsory stakeholder contributions there will be a ban on the payment of commissions except for contributions in excess of the minimum statutory amounts. Could this mean commissions paid in respect of schemes set up now would be stopped? If so, why are we bothering to help the Government achieve it&#39s aims?

Elaine Birch

BDO Stoy Hayward

NB: If the employer has historically been prepared to do this they have been storing up difficulties. If you are going to check on the compatibility of numerous individual policies I suggest you charge a fee for your time.

Alternatively, write to the IFAs responsible for each policy and get them to answer the questions. The original IFA was probably paid commission to look after the policy and presumably continues to receive renewal commission, get them to do the work.

If the Government does make stakeholder contributions compulsory but bans the payment of commission, it will either accelerate the move to fee-based advice which some employers will pay, or accelerate the extinction of some IFAs dependant upon commission, or remove the availability of independent advice for many employees.

SB: Essentially this is a problem for employers, not for IFAs. All employers now have a duty under the law to ensure any relevant employees working for them are given access to a stakeholder pension.

Employers will first need to determine which employees are relevant and which are not. This isn&#39t the simple task the official literature on the subject would lead you to believe. It is particularly complicated where employers, such as in the example in question, pay 3 per cent or more into employees&#39 personal pensions.

There is no problem with the employer paying into 10 different personal pensions for, say, 10 different employees, but he must be able to demonstrate all 10 different schemes chosen to add his contributions to, meet all of the criteria for them to qualify as an acceptable alternative to stakeholder provision.

If they all do, fine – the employees are all “not relevant”. If they do not, then unfortunately all the employees are “relevant” (even those whose schemes are acceptable alternatives) and he is obliged to provide a stakeholder scheme for them as well as contributing to their personal pensions.

For an employer to say he doesn&#39t know whether his employees are relevant or not because he hasn&#39t got a clue about the status of their personal pensions with regard to the stakeholder access criteria is probably not acceptable.

It must be worth the employer&#39s time obtaining this information because he risks a substantial fine for not doing so. It might be more sensible, though, for the employer to enlist the professional services of an IFA and pay them to spend time determining which employees are or are not relevant.

The second part of the question relates to the possibility of future compulsion. Nobody, not even those in Government, know if or when stakeholder or any other pensions will become compulsory, so the rumours we all hear from time to time are just that – rumours.

The levels of commission payable for contracts entered into now are no more likely to be affected by future changes with regard to compulsion than they are by any other future legislative changes.

SR: It is difficult to generalise, but if it is not practical to check all the existing PPs meet the exempting criteria, the employer would seem to have two choices, offer stakeholder or offer an exempting GPP as an alternative to contributing to the existing PP.

It is the offer which meets the legislative requirement, even if the employee decides to stick with the existing PP. But if there are any employees who don&#39t have an existing PP to which the employer contributes, the employer is likely to have to get involved with stakeholder, an exempting GPP or an occupational scheme in any event.

Nobody knows whether private pensions will become compulsory, let alone what that might mean for commission. It seems very unlikely that the need for advice would go away in this scenario, and that would have to be paid for somehow. The Australian experience is encouraging – IFAs have, I understand, done well in an environment of increased compulsion.

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