The corporate wrap is emerging to offer a way of cushioning an unpredictable outcome for DC retirement benefits. Pension Funds Insider investigates what this means for existing UK schemes

"Individuals have been given more responsibility and now they want more flexibility" was the verdict of Fidelity International's Director of DC Business Development Dan Smith at a recent presentation on the 'evolution of workplace savings'. For many providers a 'corporate wrap' offering workplace ISAs, SIPPS, share holdings and other saying vehicles tied up neatly into an aesthetically-pleasing interactive monitoring platform marks a new evolutionary period.

A recent Mercer survey found that 54% of employees would like an alternative investment plan to be offered at their workplace. The demand appears to be particularly strong at the top end of the market, with the lowering of the annual pension contribution limit to £50,000 in April for instance inspiring Fidelity's launch of a new corporate ISA offering.

Malcolm Small, Director of the Tax Incentivised Saving Association is in no doubt of the appeal of ISAs for pension savers, telling Pension Funds Insider: "Employees find ISAs attractive as long-term saving vehicles as ISAs are simple, cheap, easy to understand and untainted with the image of pensions as rigid and unsuited to the 21st century."

"Life has changed a lot since the present pension architecture was designed and consumers are voting with their wallets," says Small, citing figures that suggest combined ISA savings (currently £330 billion) are set to outstrip the level of employee pension contributions for the first time in 2011. The rising appeal of ISAs does not have to be at the detriment of pensions though, as the accounts could entice people into making extra saving that would be possible to divert into pensions at a later stage.

Jamie Jenkins, Head of Corporate Strategies and Propositions at Standard Life is a firm believer that corporate wraps can indeed support existing trust-based DC schemes by offering additional saving options around a "core" pension plan, in addition to fostering a saving culture. Jenkins told Pension Funds Insider shortly after Standard Life launched their Lifelens employee benefits portal that companies are already running corporate wraps with their DC schemes at the centre, "with the intention that the wraps envelop DC schemes rather than replacing them".

Providers are making high-profile efforts to try out wrap technology. Scottish Widows launched an offering last year and big corporate funds like IBM have been willing to sport the platforms (theirs is provided by Standard Life). In a dynamic new market that many providers are heavily backing, concerns could easily develop though amongst trust-based schemes of being left behind.

Neil Latham, a Punter Southall principal says co-operation is the key to not missing the boat: "Expensive systems will not be acceptable to small schemes but partnerships can allow access to attractive new developments, perhaps in white-label form."

The burgeoning 'wrap' movement raises a sizeable technological challenge, as Latham points out: "A need to bolt schemes into wraps raises questions about the authority and legal ability to gain data." Kevan Ward, Life & Pensions Product Manager at software provider and consultancy Bravura Solutions agrees that "being able to efficiently and accurately handle huge amounts of payroll and contribution information is an important and difficult task". Ward says technology is needed to act as a "coordinating umbrella" across multiple sources of data to resolve the issue.

A greater industry-wide concern might be the offering of ISAs as a means to compensate savers who see their pension plan level down. Jenkins, for instance, concedes that employers currently offering more generous DC schemes might choose an ISA as a means to compliment a more modest scheme after the launch of auto-enrolment. "We might therefore see some levelling-down of pensions but not beyond a minimum level" says Jenkins, who added that other saving goals like paying off student debt or financing a property deposit are now inevitably more pressing concerns than retirement provision for younger workers.

The Association of Consulting Actuaries (ACA) has issued prominent warnings on levelling-down before, but is optimistic about the ability of corporate wraps to facilitate a way of building back up. Spokesperson Steve Leek says that "anything that encourages people to save for retirement or save at all is good news", although he is unenthusiastic on the wider issue of flexibility which he said is being implemented in a disjointed way that can create confusion.

By the same token, there is wide consensus that if corporate wraps are to work they require effective communication to avoid confusing savers. Jenkins says that placing a range of products before people is not good enough. You have to educate people sufficiently so they can make their own saving decisions. Leek echoes this by warning: "It is one thing to create new products with a wide range of saving options but a failure to then engage at this point can lose people to saving for a significant length of time."

Privacy has been raised in the past as a concern but supporters of the product are confident this barrier can be overcome. "Our research shows there is some concern amongst employees that employers might see their wealth but also there are indications that they would be content if sufficient safeguards are built in," says Jenkins.

Others, such as Kevan Ward, are not unduly concerned either. "Technology is clever enough to screen off specified data and head off any problems off in this regard," he says. "It's possible to make data secure and in addition to that there are strict data protection laws in the UK demanding that this be the case." He also foresees platform technology advancing in the future to the stage where savers might have their debt information listed along with their asset pots.

Keeping up with potentially rapid developments in the new market could present trustees with dilemmas, adds Latham: "Trust-based schemes cannot afford to stagnate and many will consider adopting some of these new developments; however it may be difficult to identify the leading systems in this new area."

Latham predicts that this could lessen the pace of implementation as "employers are likely to be cautious while they asses the benefit gained for the time investment needed". There are also potential challenges in governance and regulation to be addressed such as whether the sourcing of providers for additional saving vehicles should be coordinated with that for pension provision.

Despite debate about the pace at which it will grow, if a market in online corporate wrap platforms can be firmly established many experts believe there will be no turning back.

"With the advent of NEST, people will expect to be able to manage their financial affairs online as the same way that they do with motor or pet insurance, and corporate wraps are part of the service for this," says Small.

The possibility of employer-funded ISAs is offered by Jenkins of an intriguing alternative to employer pension contributions. He stresses though that "the disadvantaged tax efficiency of ISAs" would ensure their continued distinction from pensions, in the minds of workers and in the letter of the law following auto-enrolment.

dbillingham@wilmington.co.uk

First published 23.03.2011