Clare Ward takes a look at the steps that corporate IFAs need to take to prepare for the introduction of personal accounts in 2012
The spectacle that was the Beijing Olympics is well and truly over and we're just left with the memories. Now all eyes are on London to live up to, and raise the bar, on Beijing's efforts.
Let's take a step back. In the lead up to Beijing there was a lot of debate around air quality, sports facilities, politics and security and London won't be immune to some speculation as we work towards hosting the 30th Olympic games in 2012. In our own industry we are also facing similar speculation and hurdles in the lead up to 2012. The parallels that corporate IFAs might face in light of the introduction of personal accounts might be compared with London's 2012 Olympic bid.
Personal accounts is the working name given to a new pension scheme which the government is creating. In 2012 all employers will be required to auto-enrol their employees into a pension scheme and the personal accounts scheme will be the 'default' scheme for those employers which do not already have a pension scheme arrangement in place.
Employers will have to certify to the Pensions Regulator how they intend to meet the auto-enrolment requirements, whether through their own defined benefit/defined contribution (DB/DC) scheme or personal accounts.
The reaction to this change is likely to be polarised between those companies which will do the minimum and those which will seek to differentiate themselves by offering their staff enhanced benefits.
For those companies already providing a pension scheme to which they contribute, some may re-assess their existing arrangements and change the levels of contribution. The level of take-up for existing schemes is likely to increase with the mandatory introduction of auto-enrolment and therefore the cost to employers will also increase. For companies which are planning to do the minimum, money will be diverted into pensions and is likely to put a squeeze on other benefits that may have been provided.
If there is a perception that the new personal accounts scheme will be easier to deal with than existing arrangements and with the possible complications around assessing whether arrangements for employees are classified as exempt, some firms may decide to sever their arrangements with existing providers and go with personal accounts. It is likely though that existing providers will fight hard to prevent this from happening and will launch campaigns to retain their customers.
For those companies seeking to do more than the minimum, some will see this as an opportunity to review and re-launch their overall benefits packages. The legislative change will bring more focus on benefits in general and the Government will launch publicity campaigns targeted at employers and employees. As the Government promotes personal accounts, employees will come to value and appreciate a good benefits package and some employers will seize upon this and re-vamp their benefits packages if they feel they are going to become a better tool for recruitment and retention in the new environment.
The Usain Bolt of pensions has been the SIPP, which has sprinted ahead since A-Day. A growing appreciation of the importance and value of pension provision greatly enhances the middle-distance prospects of this young pretender. For those who decide personal accounts are not enough, the lure of SIPPs will grow. Will employers offer a competitive solution (Group SIPP) or see employees opt-out in order to follow their own track?
Opportunities for corporate IFAs
The lead up to personal accounts presents significant opportunities for corporate IFAs.
As the legislative change comes within the typical planning cycle for businesses, advisers are now starting to discuss this with their corporate clients and there is evidence that companies are beginning to think about these changes already.
It has now been confirmed that automatic enrolment into all forms of existing workplace pension is consistent with EU law and there are indications that employers are not going to wait until 2012 to start auto-enrolling employees. The Tax Incentivised Savings Association (TISA) has been cited encouraging employers to start auto-enrolling employees later this year.
There is still a degree of detail relating to personal accounts which is not fixed and so until this detail emerges, the full impact of personal accounts will not be known. However, it is already clear that the impact of personal accounts on existing pension provision will be significant.
Group SIPPs, running parallel to personal accounts for either all or part of the workforce, may provide a complimentary solution for corporate advisers looking to retain and grow client base. Alternatively, perhaps if just a handful of senior employees are likely to look for the broadest SIPP benefits, a good 'true' SIPP provider should be sought to take these on an individual basis.
This means corporate IFAs need to start talking to their clients now to ensure they're placed in appropriate schemes in an effort to continue their ability to generate fee income. Those advisers who do not talk to their clients face the prospect that many companies opting to remove existing arrangements in preference for personal accounts, or those who might level down their contribution levels in line with personal accounts, risk the possibility of decreased levels of fee income/remuneration.
What effect are personal accounts likely to have on the overall pensions landscape?
While there is a big focus on cost when it comes to the launch of personal accounts it does not seem likely, in the short term, that this will have a major knock-on effect on other pension provision. In the longer term, however, if personal accounts are run efficiently and are seen to be a success and achieve the low cost which is targeted, then there will be a pressure on the cost of other pension arrangements. This pressure is unlikely to emerge until personal accounts are well bedded-in.
In order for personal accounts to achieve the targeted low-cost it must be highly automated with a high degree of self-service for employers and employees. Employers and employees will come to expect a high degree of access to their information across different online channels. Existing pension arrangements will need to keep pace with this change.
There is an opportunity now for corporate IFAs to work with existing pension providers and support their clients by lobbying for changes on the back of the introduction of personal accounts while there is a convergence of need between existing providers and the Personal Accounts Delivery Authority (PADA). This convergence of requirements may cease to exist once personal accounts are introduced.
As the smog builds once again in Beijing and London looks forward to its turn to shine, we can confidently say that the pension's event of 2012, personal accounts, is likely to change the landscape for the provision of employee benefits in the UK.
This means that employers are starting to think about the possible changes and impacts on their arrangements now, even though much of the detail has yet to be formulated. Corporate advisers need to be proactive and work with their clients on a plan of action for various scenarios or run the risk of significant decreases in fee income if employers move into personal accounts.
Based on international experiences in countries like Sweden, New Zealand and Australia we know wider participation in workplace pensions has a knock-on effect on financial products generally, and on the level of consumer advice needed.
People are likely to become more interested in retirement products and investment products which in turn presents significant opportunity for IFAs but on the other hand, successful companies will embrace the advent of personal accounts. The challenge for corporate IFAs will be how to respond to the changes personal accounts will bring about and manage these to achieve the best outcome for their practice and their clients.
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