Wrap in its purest form is a retirement savings vehicle and its online transparency could breathe new life into the economy and bring a measure of unforeseen trust in the pension and retirement savings sector. Could wrap become the standard means of saving for retirement in the UK?
As pension scheme deficits mount, Government departments are reviewing the Sipp and wrap concept to understand whether these vehicles could have broader application and potentially assist in the provision of retirement benefits in the public and private sector.
Pension scheme deficits have built up for a number of reasons, including pension contribution holidays, increased life expectancy, poor investment performance and, 10 years ago, the effect of the removal of tax relief on pension fund dividends.
As a consequence, £5bn a year was removed from pension savings combined with the downturn of the stockmarket between 2001 and 2003.
As a result, pension funds, many of which had surpluses in the 1980s, developed huge shortfalls, with liabilities massively in excess of assets. The combined shortfall in company pensions is currently estimated at £50bn.
Many employers have no chance of funding these shortfalls and some companies have gone under, revealing huge pension deficits.
Government legislation to prevent this, including the introduction of the Pensions Protection Fund, has increased the financial and admin burden on pension schemes.
Increasingly, private sector employers are reducing their pension liabilities by closing final-salary schemes to save money and then reducing contributions by changing their schemes to defined-contribution. New pension legislation, due to be implemented in 2012, may encourage employers to reduce their pension contributions still further to the new 3 per cent minimum requirement.
In contrast, public sector employees still enjoy a maximum pension of two-thirds of final-salary, index-linked, funded by taxpayers who have only a limited pension scheme themselves. Official figures put the value of the public sector’s unfunded pension liabilities at nearly £500bn. So are public sector pensions also under long-term threat?
Is there a solution to this problem? Could employers and the Government spread the risk of retirement provision by encouraging more individual ownership and create an environment where people feel responsible for their own security in retirement?
The Government has already gone some way towards this concept as, after A-Day, simply offering a Sipp alongside an existing pension scheme could provide a safety net for employees as there is no longer a constraint on the different types of pension scheme an employee earning more than £30,000 can open.
This means that if higher-salaried employees want to be members of their employer’s pension scheme and open a Sipp, they can do so as there is no longer a restriction on either the employee or their employer contributing to both of these types of pension scheme at the same time.
Including a Sipp as part of a benefits package will give employees a supplementary retirement income that is not linked to the solvency of the employer or indeed the solvency of the employer’s pension scheme.
But is simply providing a Sipp facility to employees alongside existing schemes enough? Or should employers look for other solutions for a wider range of employees? For example, a service that not only includes a Sipp but also includes other products such as an Isa. A solution that complements an existing pension scheme and is available to employees at all stages of their career.
Most individuals do not understand their finances and do not trust the pension industry. More education and transparency is needed. A way of achieving this could be through the provision of a menu-based or managed wrap service directly to the employee’s workstation.
Wrap is a service that allows individuals to interact with their finances online. It enables individuals to save in various tax wrappers such as a Sipp as well as in non-tax-wrapped portfolios.
This is where a wrap could be considered as a long-term option for a wider range of employees. Younger employees may find the option of a final-salary or defined-contribution pension scheme is complemented by opening an Isa within a wrap in their early employment years and as their earnings increase, they could open a Sipp, with maybe the prospect of the employer contributing in addition to providing the main pension scheme benefits.
Individuals can open a range of products within the wrap service, typically a Sipp, an Isa/Pep, also a portfolio to hold investments outside the tax wrapper and an offshore bond. Within each product, a wide range of savings and investment options can be made available depending on the sophistication and flexibility required.
Most of the wrap services available are web-based and this would offer one consolidated view of the employee’s wrap portfolio either at the product level or at the investment level. This type of independent retirement solution could give employees a realtime glimpse of how their retirement savings and investments are performing at the touch of a button rather than waiting for an annual paper-based statement.
The employee’s retirement provision will be visible, accessible and therefore hopefully greatly appre-ciated and valued.
Senior executives and employers would also benefit as the wrap facility could form part of the employment package and help with the recruitment process. Wrap could give an immediate boost to the relationship between the employer and the employee, potentially increasing the trust between them.
This solution would mean that the employee would not need to entirely rely on the employer or the employer’s pension scheme and so spread the risk, providing a degree of additional security for the employee in retirement.
The link between wrap and retirement provision is not a message that has been taken up yet by the pension experts or by the Government but pension simplification and concurrency will provide massive opportunities for achieving this.
Intermediaries who are involved in corporate advice could have a huge part to play in communicating the benefits and uses of wrap to employers.
The truth is that people are scared of being poor in retirement so what we must do through Sipp and wrap is work together to provide a new vision for retirement provision.