The personal account, the government’s planned national pension scheme for employees due to arrive in 2012, represents an opportunity and a danger for corporate advisers.
There are many issues to be ironed out before 2012 but the motivation behind personal accounts is a laudable one: a mass market, low cost workplace-based pension scheme.
The biggest danger is that employers and employees will be tempted to put off pension decision-making until the personal account arrives. That could reduce the size of an employee’s pension pot when they retire.
Advisers may see substantial increases in demand for their services over the next five years as existing and potential clients become aware of their new responsibilities under the forthcoming Pensions Act.
However, it could also be challenging to ensure any advice is consistent and takes into account the uncertainty surrounding the final shape of personal accounts and the qualifying schemes that will run alongside them. We should not underestimate the complexity surrounding the decision which individual members will face about whether to opt out of personal accounts and remain within an existing pension scheme (be it qualifying or non-qualifying).
Many older schemes may have valuable additional benefits and guarantees which will need to be taken into account. Engagement with clients and members will help them work through the relative merits of existing schemes versus personal accounts and keep them informed of how the environment is changing.
As the Bill progresses it will be important to remind employers that for personal accounts pension schemes to be both low cost and accessible to all employees, the economics are unlikely to allow for anything other than a basic simple pension proposition. There is, therefore, every reason to believe that a significant proportion of employers representing the 9m new employees who will have access to an occupational pension after 2012 will opt for a private sector solution over personal accounts.
Clearly, employers who can offer something better than a personal account should consider doing so and that’s where corporate advisers can be of greatest value. Advisers should not allow the pension “conversation” to end at personal accounts. Otherwise, employers could miss a golden opportunity to offer alternative group and occupational schemes which may have a much richer range of features and flexibility.
One other factor to take into account is that the minimum contribution limits for the personal account are relatively low. Contributions are 8 per cent of employees’ earnings between about £5,000 and £35,000.
That’s the lower end of what most employees should be contributing and it’s worth bearing in mind too that these limits will be phased in. It could well be 2015 before we see even these modest contribution minimums in place and that could mean up to seven years of decent contributions missed.
As a tool to overcome pensions inertia, the much vaunted auto-enrolment aspect of personal accounts has the full backing of the industry but under current proposals would only apply to qualifying pensions after 2012. This creates further uncertainty in the intervening four years since only some occupational schemes can auto-enrol today. In any event, delaying starting contributions until 2012 could have serious financial implications, particularly given the importance of early contributions for low and middle-income earners.
Most current schemes do not have transfer penalties and many people have more than one pension plan in place already so regulatory uncertainty is no excuse for employers not to act given the already diverse pension provision we have. Indeed, many millions of people are now contributing to occupational schemes despite years of regulatory uncertainty.
Norwich Union understands that competition between advisers is intense but those advisers who will prosper most during this period of uncertainty will be those who have sought to protect their future credibility with clients. This will involve making sure employers understand that any new scheme may be subject to change and reassuring them that strategies can be implemented to manage this change.
The reality is that if an employee pension scheme is required the time to act is now and not in 2012. That’s a powerful message that corporate advisers need to get across.