Pete Davy explores what’s driving the emergence of corporate wrap, the challenges to its take up and its likely infiltration into the market

Get ready for wrap. Mercer recently became one of the latest firms to release a platform into the wrap market, joining the likes of Hargreaves Lansdown's Corporate Vantage wrap and Scottish Widows' mymoneyworks. Friends Provident, meanwhile, is in the latter stages of development and will go live later this year. So too will Zurich and Standard Life. HSBC is putting the finishing touches to market research that will determine whether it follows suit.

"In the next year to 18 months, the market will be flooded with corporate platforms," says Mercer principal Katharine Photiou, who says that within three to five years the products will be ubiquitous.

"Every employer who buys a pension scheme on a technology platform will buy it on one of these platforms," she predicts.

There's a number of factors driving this. First, of course, the continuing decline in defined benefit (DB). Second, the advent of NEST, which means pension providers are keen to demonstrate added value, while auto-enrolment has companies looking at the future of their schemes.

Meanwhile, the Retail Distribution Review (RDR), effectively banning commission on retail investment products including corporate pensions, has advisers and employee benefit consultants looking at other business models. At Friends Provident, UK corporate strategy manager Dominic Fryer says the company is already seeing demand to white label the platform from advisors so they can use it as a vehicle to sell a range of products to their clients, taking their profits from a share of the assets under management.

"It's a fundamentally different commercial model for them," he notes.
Whether there will be the same enthusiasm for wrap from buyers is another matter. The key question is whether the products represent a response to genuine employer requirements or solutions in search of a market. To some extent, the answer is still unclear, says PensionDCisions business development manager, Nigel Aston. "I would say it is probably the former, but then, it's never as simple as that."

A monstrous proposition
Certainly there are drivers for demand. An obvious example is the reduction in the pensions contribution limit to £50,000 from April. That's likely to see some senior staff looking with renewed interest at ISAs, Save As You Earn schemes, share dealing accounts and other vehicles a corporate wrap can offer access to.

"For a large employer with a number of very high earners, wrap could provide them with an outlet," says Jamie Jenkins, head of employee wealth at Standard Life.

More widely, Hargreaves Lansdown says its research shows two thirds of pension investors would like their employer to offer an ISA account alongside the pension, and increase in the ISA allowance to £10,200 has made it, for some, a viable pensions alternative. There is, of course, a danger that implementing a corporate wrap would therefore see pension money being diverted into shorter term savings but, as Jenkins says, that's hardly the biggest problem the UK faces.

"The issue now is that we simply don't have a savings culture. If more money went into savings, we should probably define that as a success."

There are, however, considerable obstacles for corporate wrap to overcome. For a start, it's early days. Wraps have proved difficult to develop, and most of the launches to date have been beset by delays. As Photiou puts it, "when you make one of these you do create a bit of a monster".

The result is that while there will be considerably more choice by the end of this year, it's still a very immature market. Some will prefer to wait for any problems to be ironed out and to see how popular the products prove.
"There is a danger of being an early adopter," says Neil Latham, principle at Punter Southall. "After all, this isn't something members are actually asking for yet."

One particular area where further development is probably going to be needed is integration with flexible benefits platforms, since a good part of the market that is likely to be most interested in wrap have these in place. There's a number of ways that can be handled, say the providers, but for most it's still a work in progress and it's likely that will have to be done before wrap takes hold among many of those employers.

"The challenge will be whether we can get a single sign-on process whereby employees can access both a flex administration and also the wrap," explains Phil Percival, senior consultant at Towers Watson. "Flex integration is key," agrees Fryer.

Many will have time to see if such challenges are met before making a decision. After all, for a large number of employers in the small and mid-market, auto enrolment doesn't have to be implemented until 2013 or 2014. They'll be in less of hurry to rush in.

"It will be a minority of our clients who are likely to go with it this year," predicts Robin Hames, head of technical marketing and research at advisers Bluefin.

An all rounder?
But will they ultimately? Of course, much will depend on the costs. The expense and time developing the solutions mean many providers are probably going to be keen to levy a platform charge as well as charging for assets under management. Whether competitive pressures will allow them to, remains to be seen. In any case, however, small schemes are less obvious buyers. "This is a scale game," says Steve Delo, CEO at independent trustees PAN Governance. "The smaller it gets the more difficult it is to do."

But it's not just a question of size: the make-up of the workforce is a factor too. On the one hand, Photiou says she's been shocked by the range of industries from which she's seeing interest – not just obvious candidates like financial services firms but engineering companies, manu-facturers and retailers too. On the other, Tom McPhail head of pensions research at Hargreaves Lansdown admits that its mostly professional services firms that have so far signed up. However, he believes it will spread wider. The reason is that while corporate wrap might share a name with its retail cousin, the principle benefit it will offer most workers is not to give them access a vast range of funds. For the financially savvy or very wealthy that might be an attraction, but not for the majority of workers.

"In fact, there's considerable evidence to suggest that it is almost the last thing most employees want," says Ian McKenna, director of the Financial Technology Research Centre, pointing to US research suggesting that for every ten extra funds a scheme offers the number of members participating declines by two per cent.

Fortunately, however, that's not what he sees most of solutions focusing on. Indeed, McKenna reckons workplace wrap is a misnomer. "Workplace benefits platforms is a much better description of what is coming to market," he says.

What wrap primarily offers, he says, is the opportunity to provide greater education and guidance to workers on managing their financial affairs, and a vehicle to promote long-term saving for those parts of the workforce unwilling to lock their money away in a pension.

The real question, then, is whether employers will be prepared to commit to engaging staff in the process and to take a more active role in saving for their future. With DWP research showing 38 per cent of employers currently thinking the money spent on pensions is essentially wasted, McPhail reckons they can be persuaded. "This is money they have to spend anyway," he says. "There's got to be every incentive to try to ensure employees appreciate it.

"Increasing their engagement can only benefits everyone."

Pete Davy is a freelance journalist

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