The pitfalls of auto-enrolment
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Every financial advice business needs to have a plan for auto-enrolment and not just those who operate in the corporate pensions market.
When the government’s new auto-enrolment rules force employers to start automatically enrolling them in pension plans, millions more people will hold stocks and financial products and take a more than passing interest in how their investments perform.
This, of course, means that they may have less to invest elsewhere. That is why investment advisers should be braced for a potential fall in monies invested. This will depend hugely on your clients’ profile. It is pretty safe to assume that many typical IFA clients will have relatively large amounts of assets and rather complicated, if hopefully substantial, pension arrangements as part of their overall investment portfolio.
Perhaps these better-off older clients have already received substantial pension contributions from their employers. But a minority who haven’t will surely see it as being to their advantage to pick up that employer contribution. They may want advice on this or even to cut existing contributions elsewhere whether under a pension or Isa wrapper. Others could see their employer contribution fall if an employer decides to cut an existing generous arrangement because they believe that auto-enrolment will see more members join and much higher costs.
All of this presents rather thorny problems for advisers. At least you may have to factor it into your clients’ overall strategy of accumulating their investments, even if they are gradually moving towards drawing an income from them. It is a challenge to place what might be a decent, diversified, intelligently constructed and advice-led portfolio alongside one of the more conservative schemes in the market such as that offered by Nest. Do you, for example, increase the risks taken in the rest of the portfolio to compensate for Nest’s purposely conservative strategy? Where exactly do structured products fit? Will you provide advice on the pension where you did not set up the corporate arrangement but are asked questions about a default fund and its alternatives and what your client should do?
This more statist system also brings regulatory and marketing challenges. It means that politicians and consumer journalists are getting more interested in pensions. They have been lining up to slate pension charges, but this has implications right across the investment landscape. The latest intervention from the Labour leader Ed Miliband illustrates the danger. He is talking about more price caps and basing his criticisms about charges on a mutual fund from Neptune which isn’t even explicitly for use for pensions, though it could sit within a pension arrangement constructed by an adviser. The fund has had a high number of transactions and has high dealing costs, but has posted a very decent performance. That somehow has got lost, simply adding to the received wisdom that all pension fund and fund manager charges are too high. It is not surprising that the IMA has joined the ABI to protest.