The key word behind stakeholder pensions is access – giving workers access to planning for the future. But this concept can work beyond pensions too, opening up markets for other financial sales. Look first at what might seem the least obvious new market, individual sales at the workplace. Companies with no group pensions scheme at the moment may not appear to be the most caring of employers, so expecting sales of group income protection (GIP) and group life may seem unlikely. However, consider that word access again and see it another way. These are workers without company benefits, so they will be most in need of advice themselves. But the immediate threat is ill health today, not pension problems tomorrow.
According to the Office for National Statistics, average weekly expenditure is £407 (head of household age 30-49), so the single person’s long term incapacity benefit, from just £67.50 a week, is going to demand some serious life changes for anyone who becomes too sick to work. Even a dependent family of four can expect benefits as low as £129.10 a week And the opportunity to get this message across to the workers could be provided by a stakeholder visit.
Paul Smee, director general of the Association of Independent Financial Advisers, sees an opportunity on the horizon. “A small firm may typically invite an IFA to come and talk to the staff about stakeholder,” says Smee. “But talk could quickly extend to other issues”.
“For example a worker supporting both a second and a previous family will be needing life insurance as a greater priority than a pension. That’s the spirit that IFAs should be looking at this with, as an opportunity to help people with their financial planning.”
Setting up advice surgeries within companies can be very constructive and is a natural progression from the idea of stakeholder. Employers who don’t currently provide any pension will have to offer, as a minimum, access to stakeholder. And companies not providing any employee benefits could gain kudos, at no cost, by introducing an IFA to manage the financial affairs of staff.
Peter Anderson, marketing manager group risk for Royal & SunAlliance, feels this could eventually lead the IFA towards group business: “An employer may not be happy with the government-imposed stakeholder pension, but there is no choice, so the adviser has got to make it easy. If there is a positive response from the workforce to the offer of personal advice, that gives the adviser a lot of intelligence so, when they choose to tackle the employer about wider issues, at least they are not going in there with a tack which is uninformed.”
It is likely the workforce will have much that concerns them. Ill health is a very real threat facing employees and employers alike. Sickness absence costs British business £11bn each year, according to the Confederation of British Industry. With just 5.6 per cent of the working population covered by GIP (Source: ERC Frankona), a pension may only be useful at retirement if the employee continues to work and contribute. And while selling guidelines for stakeholder are not out yet, many IFAs are discussing general protection aspects with existing group clients – there are a lot of holes to be filled on the this front.
Any employer using stakeholder to replace a final salary scheme, perhaps moving in this direction for new employees while retaining a more generous pension package for existing staff, will need to be aware of the ill-health retirement problems. While final salary arrangements have a central pot to fund ill-health pension, any form of money purchase scheme relies on the individual’s own pot, and this, in the early years, can be woefully inadequate. So it is vital an IFA looks at the entire employee benefits package when talking stakeholder.
Nick Lomas, marketing manager of UNUM agrees: “Essentially you need to sell GIP and have a rider benefit which pays an extra amount to keep the stakeholder going during sickness. Under stakeholder rules, if you’re not earning you can keep paying into your stakeholder for up to five years but I suppose, after that, there’s no reason why a policy can’t put money into an ISA or another savings vehicle so there is still a retirement fund when it is needed.”
Suzanne Moore, speaking for the Association of British Insurers says: “Once we know precisely what stakeholder is going to look like there maybe some gaps in the product. Given that it is intended to be very straightforward, very simple and at low cost, some of the fancier elements are not going to be included. It may be that is where the opportunity lies for IFAs.”
What is certain is that nothing else can be part of the stakeholder itself. The proposals state that nothing, such as waiver, can be added into this new pension product.
This itself highlights protection issues, and may lead to product innovation, with providers offering group waiver products, although premiums could be too small to standalone profitably. If product providers are going to adapt in this direction it is more likely waiver of premium will be a rider to another group product.
In fact, because a stakeholder provider cannot insist on regular payments, waiver may not eventually be seen as an appropriate benefit. The argument might be that you can’t have it both ways; you can’t expect an insurer to make payments that the client is not even making themself. If this becomes the case, then it will be even more important for workers to have sound IP cover, to maintain a good level of income so pension contributions can continue even during ill health. Ideally this would be a group product but, when this isn’t possible, then an individual plan could prove a wiser investment than the stakeholder pension. Without it, anyone out of work and on benefits for more than a few months could soon lose everything today, never mind tomorrow and a low income retirement.
While employees are being encouraged to take responsibility for their own stakeholder pensions, it can be an ideal time to introduce all financial issues. Lomas says workplace intranet is a distribution method very much on the horizon, something all advisers and providers need to get their heads around.
“It really hasn’t taken off yet in the UK,” says Lomas, “but I imagine it will, and intranet sites and the internet will be very much how it will work.”
But how might this affect advisers? “Smaller firms cannot afford to have someone dedicated to researching the market to find the right products,” insists Lomas. “These are the very people who will be wanting the services of an independent specialist to sort it all out. In that sense it will be business as usual, because that’s what IFAs do and that’s what IFAs are good at.”
This can be an opportunity for any adviser who can be an integral part of setting up such a scheme, but IFAs will need to choose providers not only for products but also for e-commerce expertise. There will be ongoing administration issues as business builds and it becomes the norm for employers to set up such work sites. Also, if the increased cost of employer subsidised pensions pushes other employee benefits aside then this can redress the balance, bringing the entire range of financial services direct to the company site.
Far from seeing this as a threat to the IFA market, pro-active advisers could grow with the market. IFAs offer advice, not just products, and that doesn’t change just because information lines open up. In fact, as information increases so the confusion builds, which is where IFAs prove their worth, assessing need, assessing products and matching the two.
Stakeholder may seem some distance away, and worksite marketing even further, but they will both arrive soon and it is best to have plans ready. It is difficult to imagine a better invitation to visit those employers who have, until now, been averse to the idea of employee benefits. After all, increased access should work for everyone.