Personal accounts: the plot thickens…

Personal accounts are set to have a massive impact on employee benefits. Could so-called ‘corporate wraps’ be the answer? Steve Herbert, head of benefits strategy at Origen, looks at the evidence.

As most will be aware, this week is the anniversary of the plot to blow up the monarch and Parliament by dissident Catholics intent on forcing change to the UK constitution. But why did the plot fail?

The plotters failed to appreciate all the factors involved, and in particular human nature. So it was that Francis Tresham wrote to his colleague, Lord Monteagle, to tell him to avoid attending Parliament on that day. This one letter led to the unfortunate Guy Fawkes’ being caught red-handed, and his being hanged, drawn and quartered only a few months later. Fawkes did, however, cement his place as the most celebrated failure in UK history (after all, which other failures get an annual celebration in their name?).

Rather like 17th century politics, employee benefits are also facing change at present, but for the change to become embedded with employers, the plan must be able to face up to scrutiny.

Change

So what are the factors driving change in this area? Without question, a significant driver is the likely impact of auto-enrolment and personal accounts on the UK pensions saving industry. Put simply, the pensions industry is a tad concerned that personal accounts will reduce the savings and success of existing quality schemes, and therefore many are seeking new products that keep the industry ahead of this government initiative, and provide employers with a continuing staff retention tool.

The other significant factor is, of course, the state of the UK economy. With an unprecedented level of national debt, it is possible that some of the more favourable tax advantages of employee benefits may be gradually withdrawn as the government grapples with managing the national finances. Couple this with finite resources for both employer and employees to support employee benefits, and you will understand why change may be on the cards.

The response to these challenges is a surge of interest within the corporate savings industry for a solution that is – misleadingly – called a corporate wrap (I will use wrap for the remainder of this article). So what does a wrap offer employers and employees that the current market does not?

Put simply, wraps allow employees and employers to split the employer benefits contribution across a number of saving vehicles, not unlike flexible benefits but with a greater emphasis on cash savings. The intention is that all these vehicles are ‘wrapped’ together by a technology platform, allowing the employee to move money between the different components of the wrap to better reflect their financial needs of the moment, and take advantage of tax breaks as they occur. In addition to this, it is suggested that the technology platform will also allow employees access to other financial planning tools, and possibly even summarise the employee’s entire pension savings from across the industry, including state pensions.

Components of the wrap might include cash accounts, corporate individual saving accounts (ISAs), share plans and pension schemes. In time, other products could also be introduced; one intriguing possibility being a mortgage product.

Engagement

Supporters of the wrap concept point to the enhanced levels of employee engagement that this product is likely to produce. For instance, an employee who is carrying significant levels of personal debt – for instance, a student loan – may feel they are better served by paying off such debt before saving for a pension. Equally, in a market where 100% mortgages are seemingly dead, or at least in long-term hibernation, many employees will find their priority financial concern is building up a deposit to get a foot on the housing ladder. In both these scenarios, the employer pension contribution could be used within the wrap by the employee to better meet their immediate financial needs.

Other advantages come in the form of tax planning. An employee who saves in an ISA account as a basic rate tax-payer could roll the savings into a pension scheme once they move up an income level, and benefit from full, higher rate tax relief on the entire sum. Moving maturing share plans straight into a pension pot also carries significant tax breaks.

From the employer perspective, a wrap is likely to hold significantly higher levels of recruitment and retention appeal than a traditional benefits package, and further, the use of the share plan may assist with the tricky area of succession planning as well.

All sounds too good to be true?

Well, at present it may be. While the concept is strong, the actuality of the product is much more demanding. Big questions still remain, not least in the area of tax treatment, technology, communication and advice (all of which are potentially tricky in such a complex product). It should be remembered that if any of these are poorly delivered – or worse, go wrong – the goodwill generated with employees could rebound on the employer.

Compliance

Another concern is how a wrap will be viewed in the context of compliance with the forthcoming rules on auto-enrolment and personal accounts. One of the principle tenets of this legislation is that employers will not be allowed to encourage employees to ‘opt out’ of pension savings. This has become known as ‘soft-coercion’, and the government has let it be known that fines may be levied if it believes that employers are playing fast and loose with the legislation.

So, where does this leave us? It is apparent that the industry has set a course on delivering this product, but at present many of the unknowns still need to be addressed before a finished product is available. In particular, the various questions need to be fully answered to satisfy employee concerns about the uncertainties and risks. If the employees can not buy into the concept, then the success of wraps will be limited.

To return to the story of Guy Fawkes, careful planning is the key. Without such planning, wraps could face an end as comprehensive (although not as grisly) as Fawkes, which would be a shame for such an excellent concept. Let us hope the industry heeds the lessons of the gunpowder plotters by dealing with the uncertainties in advance of lighting the touch paper. The plot needs to be right before the fuse is lit.

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