As the launch date for stakeholder pensions gets ever closer, product providers and IFAs are now con...
As the launch date for stakeholder pensions gets ever closer, product providers and IFAs are now considering the scope to add risk benefits alongside the new integrated tax regime for stakeholder and personal pensions.
With this in mind, we conducted a survey among our panel of leading IFAs to determine their attitude to the provision of risk benefits from April onwards and their awareness of the new opportunities this can bring. We focused the survey on benefits designed to maintain contributions in force and therefore to achieve maximum contributions to the pension fund. The provision of life assurance cover within the tax-favoured pensions regime was outside the survey scope.
The survey indicated that currently most IFAs advise and complete a very high proportion of waiver cover on personal pensions products. It is incumbent upon advisers to have drawn attention to the need for this benefit to potential policyholders to comply with regulation and many providers report a very high take up rate across their personal pension products.
From April 2001, there will be a number of important changes to the rules governing the provision of risk benefits within personal pensions. These will no longer be integrated within the basic pension products but will, instead, need to be written under a separate contract which can be used to fund the pension contribution upon the occurrence of the insured event. This means that tax relief will no longer be available on the waiver contribution. The good news however, is that the product will only have to cover the net contribution, with tax relief being added on the basis of a monthly claim to the Inland Revenue from the pension provider.
It is even better news that the provision of waiver benefits will no longer be restricted to cover the risk of long-term incapacity. IFAs will be able to obtain cover to provide for premiums to be maintained when other events occur, such as unemployment or redundancy.
Awareness
Most of the panel were aware of the new rules. A number of different sources had been used to obtain information, the most frequently named being the trade press, followed closely by product providers, particularly using their technical newsletters to develop the topic in more depth. Newsletters produced by networks or by the AIFA were also mentioned as being valuable in explaining the changes.
While members of the panel were generally aware that changes would occur, 43% were unaware that, from April, the scope would be extended beyond cover against incapacity. When this was explained, a number of issues emerged.
On the positive side, 71% would seek to recommend cover against redundancy or unemployment if it were available. There were, however, some concerns about difficulties with claim payments. Some IFAs felt that the cover was expensive and somewhat restrictive and that there was a reliance on small print to avoid paying claims. There is an issue here for those providers offering this form of cover to establish credibility for the product with IFAs so that these concerns can be overcome.
We asked whether integrated packages providing both a pension plan and risk cover from the same provider, with claim payments made directly into the pension would be attractive. A direct payment into the pension plan which would not permit the policyholder to take the benefit as an income was preferred and seen as entirely appropriate to meet the objectives of the contract.
This is encouraging news since this approach, with benefits directed to a stakeholder or personal pension, will be the most effective and ensure that benefits will not be counted for means-testing purposes.
There were some concerns that those offices that are competitive for investment products would be less so for the provision of risk cover. As a result, just over half the IFAs said they would prefer to source the risk and pensions benefits separately. Within this, it was felt that the use of separate providers was more of an issue where large premiums were involved but for smaller premium cases, there were advantages in simplicity.
It may be administratively more cumbersome where the risk benefits and pension benefits are sourced separately to achieve the payment of benefits directly into the pension plan. On the other hand, if most cases where benefits are sourced separately are larger cases, means-testing may be somewhat academic.
We were keen to establish whether there were any other concerns which would make the sale of risk benefits with pension plans difficult. We also wanted to identify the qualities which would make for a good plan.
It is clear that the marketing of schemes needs to be straightforward with easy acceptance for risk covers, perhaps accompanied by a simple questionnaire or declaration for all but the largest cases.
Simplified underwriting is essential so that the sale of the investment product is not jeopardised by any delay in risk acceptance. At claims stage, settlement needs to be a prompt and efficient process with product literature written in clear language and benefit entitlement described carefully.
Complexity
A number of IFAs were concerned about the complexity, both in terms of the implications of any changes to the tax rules and the consequent knock-on effects on the product. This suggests that a simple benefit structure should be adopted. The customer will need to understand that a net payment is being made into the pension fund which is then topped up by tax relief. The link between the pension contribution and the amount paid into the pension on the occurrence of an insured event need not be precise. For instance, it would be too costly to vary the amount of the net benefit upon a 1% change to the basic rate of tax, given that currently average regular contributions to personal pensions are just £80 per month.
The research findings are good news for product providers and for IFAs. There is an enthusiasm among IFAs to provide cover alongside pensions products to ensure that funds continue to grow during periods of incapacity. The initial responses to the need for unemployment cover are encouraging, but demonstrate that there is a need for product providers to demonstrate that they can offer value for money products which meet the needs of customers.
Simplicity will be critical. In most cases, benefit levels will be comparatively modest and the underwriting approach will have to be simple so that acceptance is as straightforward as possible. Product providers should take these message on board and continue to give assistance to the IFA market through their technical newsletters and through their other marketing communications.
Ron Wheatcroft is technical manager at Swiss Re Life & Health
