Personal uncertainty

The Personal Accounts agenda is already shaping the way pensions advice in the workplace has to be delivered. James Phillipps looks at how advisers are responding, whether to exploit the opportunities that are arising, or simply to insure their businesses against an uncertain future.

As the shadow of Personal Accounts looms ever larger over the group pensions market, corporate advisers are finding the policy initiative is already significantly changing the world in which they do business.

Even though the new regime does not come into force until 2012, intermediaries are increasingly recognising the need to work out their strategy if they are to turn a potential threat into an opportunity.

With such large-scale change approaching, employers are clearly in need of and hungry for guidance, which is why many advisory firms are complaining the importance of ongoing informative dialogue between adviser and client. Meanwhile, competition from a low-charge state-sponsored pension is adding pressure to commission rates on group schemes.

Steve Herbert, senior benefits education consultant at Origen says his firm has been carrying out a regular series of training sessions for its advisers to better enable them to provide guidance to clients.

“We have put a lot of effort into training and are actively talking about Personal Accounts to our clients,” he says. “It is difficult, in that the legislation has not been finalised, but we know the broad outlines and the future changes are likely to be finer cosmetic details.”

A large part of these conversations focus on how employers with existing schemes ‘future-proof’ their arrangements. To do this, many employers will have to increase their contribution rates and possibly consider rebroking to a scheme with lower charges.

While a lot of the final details of Personal Accounts have not yet been set in stone, it is widely anticipated that many employers will have to raise their contributions to over 4 per cent to be considered a ‘good scheme’ and gain exemption.

Simon Webster, managing director of Facts & Figures Financial Planners says he is actively encouraging clients to embrace the pending changes early so that they are seen to be acting in the best interests of their employees.

“In order to retain and attract staff it is far better to make any changes early. It sends out a very different message if you are only making changes to your benefits package because you have to,” he says.

Webster believes the majority of employers with existing pensions will opt out of Personal Accounts because the reason they chose to offer an employee benefits package was to be viewed as an employer of choice.

As part of this process, however, many of these companies will need help both to ensure their schemes are compliant, and in managing the cost of the transition.

The higher cost of increased contribution and participation levels can be offset in a number of ways.

Kevin Harrison, technical manager at Clarkson Hill has spoken to several clients about phasing in higher contributions over time and sharing the burden with employees.

“The changes could be structured as part of the company’s pay review process. Increases to an employee’s remuneration could be split between an increase in their salary and a higher employer pension contribution,” he says.

Harrison brands this approach “pseudo-salary sacrifice”, but a more traditional salary sacrifice or a simple offsetting of wage increases would also help manage costs.

However, there are concerns that an employer’s efforts to up its pension contributions as part of a staff retention policy could be undermined if the scheme that they are offering has a high charging structure.

Many companies are still offering pensions schemes, whether GPPs or group stakeholder arrangements, with an annual management charge of between 1 per cent and 1.5 per cent.

The charging structure of Personal Accounts is currently under consultation. But, if as expected, the AMC comes in at around 0.7 per cent, Herbert warns that companies may be faced with an embittered workforce if their scheme has significantly higher charges.

“If your company scheme charges 1 or 1.5 per cent and you can see the Government scheme comes in at half that, then it is going to be bad for staff retention. The charges will particularly impact upon lower earning employees,” he says.

Companies, particularly larger employers, should be paying way under 1 per cent, Herbert says. He believes advisers can get still get great deals on GPPs – he secured a GPP for a medium-sized employer on 0.3 per cent last month – despite several product providers backing away from the market.

But no matter how keen an employer is to offer the best possible benefits package to its staff, the likelihood of increased costs will be an unassailable obstacle for many firms.

“There is a danger that companies whose schemes have eligibility criteria might be forced to level down because they will have to extend that provision to a whole host of other employees and cannot afford it,” Harrison points out.

Anecdotal evidence from advisers suggests that very few companies have started levelling down yet.

But Mike Fosberry, head of pensions at Smith & Williamson believes that this process has merely been delayed both by the time lag until Personal Accounts are introduced, and the lack of skilled workers in many sectors of the economy.

“My biggest concern is that we will see a general dumbing down which will have more impact on new members where employers do no more than the minimum required by legislation,” he says. “We are not seeing companies reducing contribution rates yet but that is partly because the labour markets have been so competitive. But if the economy continues to slide and unemployment rises, finance directors will be looking to cut costs.”

A worsening business climate is also set to make those firms without arrangements in place more likely to defer introducing a scheme and wait for Personal Accounts, he adds.

Jeremy Ward, head of pensions marketing at Friends Provident, agrees, but adds that there will always be a number of employers who either only pay lip-service to employee benefits or try to avoid providing them altogether.

“Advisers may have to recognise that these types of clients are the ones that will end up in Personal Accounts,” he says.

Focus – Pada admits there’s no silver bullet

The Personal Accounts Delivery Authority has begun canvassing opinion on what shape the regime’s charging structure should take.

Pada has launched a consultation paper outlining three options – an annual management charge, a joining fee or a levy on contributions.

Chief executive Tim Jones admits there is no “silver bullet” and initial industry reaction is divided. Some favour a combination of annual plus joining or contribution charges while others, such as Aon, warn this will be too complicated and penalise lower earners.

Aegon Scottish Equitable has also waded into the debate, calling for Pada to release breakdowns of its assumptions of costs depending on how many people join, how much they invest and how long they invest for.

Head of pension development Rachel Vahey warns if fewer people are auto-enrolled than projected then either costs will rise or the Government will be forced into the undesirable position of acting as the ultimate guarantor.

In a busy month for the organisation, both Jones and chairman Paul Myners also faced some tough questions at a Pensions Bill evidence committee.

Lower earners were again the focus of concern, this time around the issue of how Pada can ensure the estimated 50,000 workers with multiple jobs each paying under the £5,000 auto-enrolment threshold do not lose out.

Jones said he is looking into the issue but in a further indication of the growing complexities besetting the regime, surprised many by saying he expects Personal Accounts to offer as many as 15 funds. Pada had previously suggested four or five.

Jones recently hinted that 2012 may be an unrealistic goal and few would disagree. The infrastructure still has to be built and issues around low earners, means-testing, fund providers and how generic advice can cope with this ironed out. Few would bet against Jones’s caution.

Case study – The end of up-front commission?

Friends Provident became the latest life company to pull back from generous up front commission in the group pensions market last month. Following a strategic review, Friends said it will no longer pay up front commission on new group pensions business. The insurer took a £160m hit due to low persistency in its latest annual results, announced in January, and said it is only focusing on “larger, high quality schemes.”

Head of pensions marketing Jeremy Ward says the advent of Personal Accounts was “a factor” but maintains the overall long-term economics of the market was the main driver.

He admits the company’s new tack on commission will hit volumes as a quarter of its new group pensions business is commission-based. But Friends hopes the remainder – 50 per cent from new increments from existing schemes and 25 per cent fee-based, will be unaffected.

Friends’ move follows similar withdrawals or parings back of commission levels in the group market from Standard Life, Prudential and Legal & General.

Life industry analyst Ned Cazalet has long warned about the unsustainable nature of the economics underpinning group pensions sales. With life companies commonly facing breakeven times upwards of 10 years on GPP business, it is no surprise many are backing away. The looming spectre of Personal Accounts only exacerbates the problem.

Steve Herbert, Origen senior benefits education consultant urges commission-reliant advisers looking to rebroke client schemes in preparation for 2012 to act quickly.

“The number of providers in the market offering commission is narrowing and will continue to do so but there is a chance to act now while you can still use commission to offset client’s costs,” he says.