Pension products

The Pension Act 1995, the Greenbury Report and cases such as Brooks v Brooks and Ramsay v Caboche have focused industry attention on occupational pension schemes and the repercussions of changes in legislation and practice in this area.

However, the introduction of commission disclosure in early 1995 also had its own impact on the personal pension markets. In the hunt for new customers, many pension advisers have restructured contracts to provide more flexibility and openness and new providers are beginning to make an impact as the assessment of insurance company costs and advisory remuneration becomes an issue.

The origin of the change can be traced to 1988 and the emergence of niche providers such as Professional Life, Provident Life and Rothschild Asset Management, together with Fidelity Unit Trust Pension schemes.

For the client, these schemes provide a 'clean' contract on which no indemnity commission is payable. For advisers, it means charging a fee to be remunerated for the sale of a contract.

The acceptance of fee-based financial advice on the wave of consumer discontent after commission disclosure has created a superb chance for the provision of low cost pension contracts.

The disadvantage is the lack of secured funds from many of these contracts. Few of them offer with-profits or gilt-linked contracts – many only offer exposure to equity markets. A further disadvantage is the relatively small size of these funds. This may prejudice their ability to accommodate the major redemptions which might be needed if the so-called 'demographic time-bomb' appears.

One popular way of addressing the problem of secure funds may be the use of Self-Invested Personal Pensions. SIPPs allow the pension member, or adviser, to select a range of their own investments which can be tailored to individual requirements.

The secured equity products, with-profits bond products and gilt-based products available through the insurance markets can be used in a SIPP to provide an element of secured investment and the bed-rock for an individual's pension provisions. Other investment opportunities via SIPPs include certain types of property investments, certain derivative investments and investments which can be tailored to a given retirement date.

There are restrictions on investments in 'pride in possession' assets such as works of art, vintage cars and yachts in the Mediterranean.

The SIPP route can take two separate forms – fully self-invested (where the fund is held on trust by the pension provider purely for the benefit of the individual), or through a fund notionally allocated which must be revalued for a unit valuation at regular intervals.

The introduction of draw-down facilities from personal pensions highlights the need for advice on SIPPs to ensure the investments of the scheme are monitored and tailored for each individual's requirements.

Other recent developments include staggered vesting which relies on a tax-free cash sum to provide the annual 'income'. Should the rules on the tax-free cash sum be altered in the Budget at the end of this month, the effect on staggered vesting would be far-reaching.

New rules have also been introduced involving certain inheritance tax planning provisions and protective trust mechanisms which would come into force in the event of bankruptcy.

A new variation on the theme is the execution-only contracts, currently offered by ordinary retailers such as Marks & Spencer and Virgin. These contracts are not popular in the insurance industry because they may encourage less prudent individuals to forsake company schemes or perfectly acceptable pension providers in favour of a well-known brand name. A certain 'brand' of pension fund may sound attractively reassuring but pensions should hardly be regarded in the same light as underwear.

Legislation as complex as the Pension Act 1995, with its 180 sections and seven schedules cannot be so easily distilled for the man on the Clapham omnibus. However, SIPPs, investment trust pensions and unit trust pensions are here to stay.

It is now up to the providers to respond by up-dating their contracts and proving they have the ability to be competitive in a challenging market-place.