Old can be gold

Finding employers and employees better terms for their workplace pension schemes is a valuable service. There are still bad old contracts out there that need revisiting, says James Phillipps

The A-Day affect may be starting to peter out but opportunities remain for corporate advisers looking to bring in new clients and build their revenue streams. The onset of stakeholder charging in 2001 may well have shaken out many of the older, high-charging schemes, particularly in the group market, but billions of pounds remains in expensive contracts and underperforming funds.

“Although the majority of these schemes are closed to new contributions in the group market,” says Andy Tully, marketing technical manager at Standard Life. “There are still a number open, mainly in small and medium-sized companies.”

The major obstacle for advisers wanting to target this sort of business is tracking these schemes down.

Hamish Wilson, a consultant at HamishWilson & Co, says the majority of the older higher-charging schemes are still serviced by those insurance companies such as Norwich Union that still provide “lock, stock and barrel” administration, investment and actuarial services.

The majority of insurers on the other hand, including the likes of Standard Life and Friends Provident, have already unbundled their offerings with many switching the pricing on their pension schemes when stakeholder charging came in to prevent clients walking out of the door en masse.

But if poor value older schemes can be identified, there are opportunities for advisers to tidy up these often dormant schemes.

“If they are closed to new accrual they are no use to the human resources director as a recruitment tool, so they pass to the finance director. Some won’t be interested, but others will want to tidy up these old schemes,” Wilson says.

One way to fish for potential new clients with older schemes is to actively target companies that have recently hired a new finance or human resources director, says John Scully, a director of The Independent Life & Pensions Group.

While an incumbent may be blasé about making changes, an incoming finance director may see it as a way to instantly make their mark.

“It helps if you can hit the desk at the right time,” says Wilson. “You will both be new brooms and they may appreciate listening to someone independent.”

Advisers working on a fee basis will have to convince potential new clients that still have bundled arrangements it is a worthwhile expense as they will not be used to writing out cheques for pensions advice.

On top of this, the older the group scheme, generally, the more complex the contract. Whether the scheme is invested in a managed fund or a with-profits fund, all too often there will be significant barriers to rebroking the scheme, regardless of whether it is still open to new contributions or not.

“Some of these funds have horrendous charges and poor performance, but they all have exit penalties, which puts people off,” says Nic Nicolaou, head of corporate solutions at Hargreaves Lansdown.

“It is very difficult for the adviser because it is an emotive issue and people do not like the idea of having to pay a penalty.”

He says he has come across several older style schemes with such steep exit penalties that a £10,000 fund value may only actually have a transfer value of £6,500. Careful calculations are clearly needed, particularly where there is poor fund performance and the impact of ongoing higher charges considered.

“If you compare these schemes to modern stakeholder-style schemes, in many cases there is relatively little difference in taking the transfer value if you are working with a 7 per cent assumed growth rate longer-term,” Nicolaou adds.

That is of course if the assumed growth rate is met.

There is a further layer of complexity facing corporate advisers reviewing older schemes when there are also guarantees in place.

A number of group with-profit schemes from NPI and Standard Life offer guaranteed investment returns of 4 per cent a year, for example. While not performance that will excite, it can further muddy the waters when there are exit penalties. More attractive still are the guaranteed annuity rates built into certain contracts.

One bright spot is the decline of market value reductions. The majority of open with-profits funds no longer have MVRs of any note, if at all. The flipside of that is the argument that even if investors had taken a 15 per cent MVR four years ago, they would have more than made this up due to the strong performance of the stockmarket over that period.

Tully also points to the difficulty in closing these schemes posed by problems in tracking down deferred members.

However, the tidying up of companies’ older schemes, particularly closed ones, does not have to be restricted to these types of arrangements.

Scully says ILPG has regularly targeted areas, such as dormant executive personal pension schemes.

He says these can be cleaned up through bulk transfers that can be structured so that members’ benefits, such as higher tax free cash entitlements, are not lost.

Companies may also have closed contracted out or contracted in money purchase schemes that can be tidied up in a similar way, Scully adds.

Many of these older schemes come to light, and indeed often more are generated, when companies make acquisitions. Wilson recalls that when he previously worked at Bacon & Woodrow, now part of Hewitt, it acquired a large new client that had grown almost solely through acquisitions.

The company had 17 arrangements in place and while the scale of the task was daunting, B&W was able to generate significant cost savings for the firm.

“Where a company has made acquisitions the adviser can add value by amalgamating schemes. In this case the cost-saving of not having to pay for 17 audits and 17 actuarial valuations and so on, were significant,” Wilson says.

Taking a slightly different approach, Scully says if one of ILPG’s clients is acquired by a larger firm, it sees it as an opportunity to capture the combined group as a new client.

“We produce a bespoke company handbook and have found this gives us the edge when the acquiring company sees how we operate,” he says.

Approaching potential new corporate clients can clearly be done in a number of ways and firms often have quite individual approaches.

Referrals are clearly what most adviser firms aspire to, but Nicolaou says around 30 per cent of Hargreaves’ corporate pensions business is effectively cold-calling clients.

His firm uses different techniques, including ringing companies direct and sending out mailshots.

Hargreaves believes it can typically achieve a better arrangement for a potential client around six or seven times out of 10. It tends to look at the group pension scheme on a standalone basis and will outsource group risk to a specialist broker.

In contrast, Scully says ILPG often wins new clients by focusing on a company’s overall employee benefits package.

This forms part of the firm’s ‘wine challenge letter’. As part of its approach letter, ILPG offers a company a case of wine if it cannot offer the potential client better terms and conditions.

“We have never given one out yet. You often find group life is not often reviewed and you can find companies a better deal on income protection, critical illness cover and associated benefits,” he says.

Similarly, Tully says companies can also be won over by ideas like salary sacrifice, which they may not have previously considered.

“This can be used to cut costs as it is more tax efficient and we are seeing growing interest from finance directors,” he adds.

With pensions an issue rising up many corporates’ agendas, advisers may well find a more receptive audience if they are willing to go that extra mile and innovate in their attempts to get better terms for their clients.

Expert view – Do not neglect existing clients

Advisers are being warned not to fall into the trap of neglecting existing clients in the pursuit of new ones.

Even schemes brokered at the introduction of stakeholder charging in 2001 can now be seen as comparatively expensive.

Loretta Mooney, Chambers Morgan adviser, says over the past couple of years her firm has carried out a number of changes to existing clients’ schemes. This has mainly involved reducing the arrangements’ annual management charges by moving them to a fund-based commission structure.

Mooney says: “We have also introduced wider fund choices and given clients’ employees access to a range of online tools. Moving to fund-based commission enables us to align our remuneration with the level of servicing the employer expects.”

Even larger clients may be running schemes where costs can be reduced significantly.

Andy Tully, marketing technical manager at Standard Life, says he was surprised to discover a large FTSE 100 company with “tens of thousands” of employees running a group stakeholder scheme on a 1 per cent charge.

“A company that size should be able to get the scheme at a substantially lower price,” he notes.

On a cautionary not, however, advisers are warned to be wary of rebroking schemes too regularly as this could breed distrust.

Mark Andrews, managing director at Purplecircle Consulting says even if the reason for change is laudable, there is a risk of a negative psychological impact on the workforce. He adds: “Even if it is not change for changes sake, the employer may ask why a scheme is being changed so soon again and the employees may be suspicious there is a greater motive at work.”