NEWSLETTER: A Case for Corporate SIPPS?

Contributed by MW Pensions. [www.mwpensions.co.uk]

This Newsletter is intended as technical support for Financial and other professional advisers. Members of the general public should not rely upon it

Corporate SIPPs v NEST
We believe that Corporate SIPPs will become a major market. Employers have moved away from Defined Benefit schemes and Stakeholder and GPP schemes may have hidden charges for investments. In addition, increasingly employers are concerned at putting their employees into an insured scheme which ties them into a particular investment house for many years. A particular insured investment might be a good investment now, but will it be so every year for the next 20+ years? A corporate SIPP removes that risk from the employer as the member will ultimately be responsible for the investment choice. Whilst there may be a “default” investment strategy (as explained later) under a Corporate SIPP any member will always have the option to move away from the default investment strategy into their own choices of investment, thought his may incur additional fees (this is also discussed in more depth later)

There have already been a number of major plc’s (BT, GSK etc) who have opted for the Corporate SIPP route. We believe smaller and medium sized employers, particularly those who are the more “caring” employers, will be interested in putting in place a Corporate SIPP.

With NEST coming along, the savvy IFAs might wish to raise the option of a Corporate SIPP with their clients.

How will NEST work?
With NEST:

1. No transfers in or out will be allowed for the first 5 years
2. The charges under NEST will be 0.3% per year plus a “temporary” charge of 1.8% on all contributions. “Temporary” here may mean up to 20 years!
3. The maximum contribution will be £4200 per year (2011/12), which will increase each year in line with National Average Earnings
4. Contributions will be phased in over five years depending on the size of the employer/. Employers and employees only have to pay combined minimum contributions of 2% of qualifying earnings, rising to 5% in October 2016, with the full 8% minimum contributions starting in October 2017. When full contributions are being paid, employees will need to pay a personal contribution of 5% (4% with a further 1% tax relief being added).
5. Qualifying earnings are the band of gross earnings payable to the employee between £7,475 and £38,185 (2010/2011) based on a 12-month pay period. These figures are expected to be uprated for 2012. Earnings for this purpose include salary, commission, bonuses, overtime, statutory sick pay and statutory maternity pay
6. Employees will have a limited choice of investment funds (including higher risk, lower growth, ethical, Sharia and pre-retirement funds) in addition to over 45 target-date funds (which will also serve as the default option where the member makes no investment choice). These are based on the date the individual is expected to retire
   
   
   
7. Retirement can take place from age 55 onwards, and the same pension and tax-free cash options available under other pension arrangements will apply (except for death benefit lump sums which will not be payable on a discretionary basis and will therefore potentially be subject to Inheritance Tax).

So how would an MW Corporate SIPP work?
The trick with any Corporate SIPP is to keep the costs down so that it is competitive. Remember that a Corporate SIPP will have to deal with a lot of small monthly investments. If someone is on £24,000 a year, and the total employee/employer contribution is 8%, that’s £160 per month. So what does that mean?

Quite simply:

1. The MW Corporate SIPP must be on a platform
2. Contributions each month go direct from the employer’s payroll system to the platform. Obviously care will be needed to ensure the right contribution is credited to the right member. But that is not beyond the wit of modern payroll and platform systems.
3. The IFA will need to put in place a “default” investment strategy eg 25% goes into each of 4 defined funds. So each member will have the same investment strategy. Obviously, depending on size, different strategies could be put in place – such as low/medium/high risk options or options that vary with age. But the extra administration costs etc of any such complications have to be watched
4. Normally the costs of the MW Corporate SIPP would be met by the employer. These include the administration fees and the (explicit) investment fees. Other costs would be borne by the individual member’s SIPP. It is important that all costs are explained to the member – and that it is made clear who is responsible for them: for example, who pays the administration costs should the member change employment?
5. All members would have the choice of opting out of the default investment funds into funds of their own choice – but the costs associated with that would normally fall on the member
6. Senior management might have a wider investment choice, perhaps even full SIPP options, with some or all of the extra administration costs being met by the employer
7. In selecting the default funds, the IFA would have to ensure the selected funds could efficiently cope with small monthly investments – in our example above £40 per month would go into each of 4 investments

What are the advantages of an MW Corporate SIPP?
There are a number:

1. It can accept transfer values – how many employees will have old under-performing insured pensions?
2. Investment advice aimed specifically at that workforce, from a regulated IFA
3. The ability to offer wider investment choice eg to senior management
4. NEST administration is going to be impersonal and run by large corporations. An MW Corporate SIPP will give personal service
5. Bear in mind too that, under the Retail Distribution Review, from 31.12.12 commission on new sales of pensions will be banned. Advisors will need to agree a fee for their services. So it should create a fairer playing field.

When might NEST or a GPP be a better option?
NEST or  a GPP might be a better option if:

1. The company wants to provide the bare minimum pension provision for its employees
2. The company might prefer the simplicity of using NEST or an insured product
3. A platform is necessary for the MW Corporate SIPP, and either the IFA or the company may prefer not to use a platform
4. The Company does not want to incur the explicit additional costs associated with a Corporate SIPP (but they and their advisors need to ensure they are aware of both the explicit and any implicit costs of an alternative insured arrangement

What does the IFA have to do?
They have to find the potential clients. Many of their existing clients will operate their own businesses and IFAs should know which of their clients fall into the “caring” employer category, who might well be interested in a Corporate SIPP.

They will need to do their research and due diligence into the various platform options. Which ones can cope with regular small investments? Which have the systems in place to deal with the administration? Which hold the funds that the IFA will want to use? What are their charges?

They will need to do research and due diligence into potential fund options. Are small regular investments possible and cost effective?

They will need to put in place a monitoring system re the underlying investments, to ensure they remain suitable and appropriate.

Their reward will be a fee, paid by the employer, which should fairly reflect the work that will need to be put in.

Transparency and understanding of costs
Corporate SIPPs have some interesting characteristics. Like any other corporate scheme they will, for many years, be substantially accumulation funds. In other words, members will be growing their investment pots and it will be many years before there are substantial withdrawals. In addition, transfers into the MW Corporate SIPP can be expected from existing (typically underperforming) insured funds. Not only does this mean that the IFA can earn additional fees from giving transfer advice, but the funds under management within the MW Corporate SIPP will grow very quickly for the first few years. Simple mathematics says that, ignoring investment growth, if a member starts with nothing and pays in £160 a month (our example above), then at the end of year 1 there is £1920 in his fund. At the end of year 2 his fund will be £3840, growth of 100%. At the end of year 3 it will be £5720, growth in year 3 of 50%. And so on. On top of this, there will be investment growth. Add in transfers – which in proportion to contributions will be very much larger, and it is easy to see that the funds within an MW Corporate SIPP will quite quickly become significant.

This is obviously of interest to platforms (who might initially shun the idea of an investment of £160 a month) but it will need to be explained to them very carefully and realistically.



Similarly fees may initially appear to be high, but then they will be a high percentage of a very small number. Quite quickly they will (or should) become not an issue.

We would welcome feedback from advisors on our thoughts on this matter and look forward to working with a number of them in setting up new MW Corporate SIPPs.

Gilt Yield for Drawdown
The gilt yields to be used for drawdown calculations are:

We do not give financial advice and no comments here are intended as such. The above information is based on our understanding of the legislation governing pensions at the time of writing. Before taking any action you should consult a qualified financial and/or tax adviser. Levels, bases of and reliefs from taxation may be subject to change.

This Newsletter is intended for professional advisors only, not members of the general public

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