For virtually all businesses, the cost implications of auto-enrolment in 2012 are massive, particularly as they will be coming on the back of the current recession. Added to this is the poor performance of many funds and the fact that the Budget changes to tax relief for high earners have disengaged a number of key decision-makers within these firms.
Personal accounts offer a ready-made means for employers to jettison their individual pension responsibilities while saving face, secure in the fact that the scheme is Government-backed. The issue for the industry is how many companies choose to level down or give up the ghost completely and what advisers and providers can do to minimise this.
“You have to take the view that personal accounts will work,” said Duncan Howorth, managing director of JLT Benefit Solutions. “If it does, you could argue that it is all people need. All the work that we will be doing with clients over the next three years is going to be shaping up against personal accounts and you cannot underestimate it.”
Much of this effort will be around improving the image of pensions and increasing member take-up while also building on the extras that personal accounts will not offer at launch such as providing a comprehensive flexible benefits package.
Robin Hames, head of technical, marketing and research at Bluefin, believes that this is a key tenet of the argument for companies continuing to offer their own schemes and rather than adopting a narrow focus on pensions, both employers and advisers should be viewing them as part of an overall employee benefits package, particularly if the firm wants to be seen as an employer of choice.
“There is undoubtedly a desire for branded arr-angements so the employer can say ’this is what we are doing for you’. Rarely have we talked about cost first with clients, it is about the benefits,” he said.
Rudi Smith, a senior consultant at Watson Wyatt, agreed, noting that this is especially the case in companies where the responsibility for pensions lies with human resources, where the head of the department will typically view the employee benefits package as an important tool in attracting and retaining staff.
“There are a lot of large employers that want to take responsibility for pensions and look at it as part of the overall package for employees and personal accounts are not part of that,” he added.
Indeed, corporate advisers report both strong and growing interest in non-core benefits. Salary sacrifice is a case in point and despite losing its appeal for those earning over £150,000 following the Budget changes, it remains highly valued by many companies and the vast majority of their workforces. As an example, over 80 per cent of new schemes set up by Alexander Forbes Financial Services are written on a salary sacrifice basis and the appetite for funding reward packages in a smarter way such as through the cycle to work initiative and childcare vouchers, is equally strong.
Allied to this are the advances in online support, with providers having poured millions of pounds into improving their extranets, enabling members to view their pension details and switch funds via the internet.
However, Howorth cautioned the industry against resting on its laurels in this regard, as the factors that are differentiators from personal accounts now may not be in the future if the Government-backed scheme becomes more sophisticated.
“If you look a little further ahead, say, to 2017, a lot of the limitations of personal accounts, such as accepting transfers, will have been taken away,” he said. “In terms of investment, it is going to be the bellwether and the benchmark that everyone will have to perform against.”
Certainly, taking on personal accounts on the inv-estment front has risks and the FSA has already war-ned that offering a wider fund choice alone is not suff- icient grounds to recommend a group personal pension to clients over personal accounts, particularly if the charges are higher. That said, many advisers will be confident that they can put in place schemes for medium- to large-sized companies that are broadly comparable with personal accounts’ anticipated 0.5 per cent annual management charge while still offering a broader and more sophisticated fund range.
Martin Ralph, pension & retirement benefits director at Willis Employee Benefits, said that the Government-backed scheme’s low-rent and apparent one-size-fits-all approach could also be seen as a weakness in that it does not appear to attempt to identify individual attitudes to risk. On top of this, although it will undoubtedly be one of the best researched default funds in the market, it is unlikely to be able to offer the levels of sophistication and diversification that private sector developed versions can due to its in-built cost constraints.
He pointed to the strides forward made in recent years by insurers, many of which now offer default funds with an effective trustee overlay but in a contract-based structure, as well as access to alternative asset classes.
If the default fund is an area ripe for differentiation, then this will need to be supported by a considerable amount of member engagement.
Howorth said there is a danger that a 55-year-old in a private sector scheme will disappointedly compare the annual performance of his pension fund to that of a 20-year-old in personal accounts.
He pointed out that there should necessarily be different levels of performance between the funds of members of different ages and risk profiles but education is essential for individuals to understand why this is the case. There is also the question of whether the performance of an employer’s default fund against personal accounts is in itself a sufficient measure of success. Hames says: “Should our success be measured against the performance of the default fund or being more successful in eng- aging members enough to make their own investment decisions?”
Clearly, in each firm, there will be employees who readily engage, others that take more encouragement and a rump that will never be interested.
The same can be said at the corporate level, where consensus suggests there are a number of companies that want to maintain their provision, a middle ground that is deferring the decision and many that do not currently offer pensions or those in sectors with large, low-paid staff forces with high turnover, that will opt for personal accounts.
David Bird, a principal in Towers Perrin’s retirement practice, said: “I was doing a pension review for s client, a large retailer, which wanted us to look at its DC scheme. During it, one of my colleagues said to them that they have to think about personal accounts – they can outsource their pensions promise at a core level for everyone.
“The client said ’they are building a pension scheme for my employees’ and it is an interesting way of looking at it. They definitely have a place.”
He also believed that without sufficient education, some companies that would otherwise be happy to continue providing a private sector scheme for their employees may opt for personal accounts in order to cover their backs legally.
Even where employers do maintain their existing schemes, a degree of levelling is inevitable and indeed is already starting to emerge.
Clive Grimley, a partner at Barnett Waddingham, pointed to American Express axing pension contributions as potentially the tip of the iceberg. “The understanding of levelling down is getting through to employers, for example, Amex, and we have had cli- ents do the same on a smaller scale. It is for genuine commercial reasons but it is a real worry,” he said.
The challenge is on for the industry to underline to clients the value of offering their own branded scheme and the countdown really must begin now rather than in three years time. Unfortunately, advisers have to battle not just personal accounts but also the grim economics of the recession. Clearly, both innovation and ongoing communication will be key to ensuring that private sector pensions remain the retirement savings vehicle of choice.