Aegon's Rachel Vahey looks at the forthcoming challenge of auto-enrolment
There are now less than 30 months to the advent of automatic enrolment. Whereas we are gaining a clearer picture of how the changes will affect corporate clients, less has been said on how the changes will affect the individual retail pensions market. One thing's for sure, it will change significantly in the run up to 2012 and beyond.
Many people who have taken out individual plans did so because their employer didn't offer them a group scheme. But under the new rules, all employers (apart from single person companies) will have to automatically enrol almost all workers into a pension scheme and pay a contribution for them of 3% of a band of total earnings. If these individuals choose to opt out they will lose their employer contribution, so many will decide to stop the old plan and switch their current contribution to the new employer plan instead. Alternatively, they could keep their current plan going in tandem to the new one - performing a ‘top-up' role.
If the employee has some influence with the employer, they might persuade them to contribute to their current pension plan instead of automatically enrolling them into a group arrangement. The employee could then choose which pension plan they want to use. This could, in theory, be a SIPP.
The DWP was toying with the idea of including separate guidance on using SIPP as an automatic enrolment scheme, but this has now been dropped. Broadly, as long as at least the minimum contribution is paid and the scheme doesn't force the individual to make a decision - for example on investment choice - then it can be used for automatic enrolment. In theory, SIPPs should be able to be adapted for this purpose by including a default fund. Once a member, the individual can then make a decision to ‘switch on' self -investment and choose the appropriate funds.
But a default fund can seem a clumsy addition to an individual vehicle which is all about sophisticated investment options. In that case, the employer might choose to automatically enrol the key employee into a group arrangement on the understanding the employee will opt out and instead join a SIPP, and still receive their employer contribution. This is allowed. The pensions regulator is on the look-out for employers coercing employees to opt out purely to save employer contributions. But this case, where the employee still gets the employer contribution, shouldn't present a problem. The only concern is the paperwork involved in the employee opting out and the employer having to re-enrol them in three years' time.
The self-employed are also affected by pensions reform. Although not automatically enrolled, they can choose to join NEST if they want to. For some, especially the lower-earners, NEST may be a competitive alternative to a personal pension or stakeholder pension. But for the higher-earning self-employed SIPP will probably still offer the edge, providing more options to meet their needs.
Finally, there is the question of what advice should be given today, bearing in mind pensions reform is around the corner. The FSA has said that where an individual has a need and a desire to save, putting off saving until pensions reform begins would not be in their interests. But advice must take into account the effect automatic enrolment will have, and this will increase the closer to 2012 we get.
From this, it's obvious advisers need to keep abreast of current developments, and how pensions reform affect their individual clients as well as their corporate ones, and build that into reviews with clients.
Rachel Vahey is head of pensions development at AEGON
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