My assumptions are;-
We are about to enter a new world where trail commission, active member discounts and higher cost investment defaults play no part in auto-enrolled workplace pensions.
Assuming the DWP’s impact assessment is correct, there will be some 90,000 workplace schemes that would not qualify with a 0.75% cost cap. This big number is as open to question as the cost assumptions that suggested the SME cost of AE was under £100, it’s not the accuracy of the number but the ball-park that needs concern us today.
Within the 90k there will be some schemes that meet the cost cap but employ differential pricing, those that meet all price requirements but pay trail commission and schemes that fall foul of some other regulation that need further tweaking to get onboard the AE bus.
Many insurers publicly state that the disturbance of having to re-write so many contracts will tip auto-enrolment into chaos.
In my new paradigm, we simply move from old to new. The transition to new will no doubt take time (and I am sure any recommendations will recognise this) but for those in uncompliant schemes, there is no time like the present. The sooner the migration from old to new goes ahead, the better.
Which begs a few questions about process
What back-testing for qualifying AE schemes will need to be done? How will they evidence compliance and what will be the timeframes for restitution for those who cannot demonstrate a clean bill of health?
What process will be adopted for existing schemes intended to be used for AE but yet to be granted qualifying status? What will be the leniency to employers who cannot migrate prior to staging?
What if any obligations will be imposed upon the agents of schemes where commission is being taken? Will they be obliged to disconnect the umbilical themselves? Will they be rewarded for cutting off their revenue scheme. It seems unlikely that advisers will be too enthusiastic to do free work which leads to financial impairment.
Are their resources within providers to take over the client relationship of these schemes if existing advisers cannot agree a fee based remuneration structure with the employer and what happens if not?
How will advisers have to account for the financial reversal. Many are financed on the assumption that the trail commission is baked into future revenues, without the trail, are such advisers solvent? What will be the banks attitude to the presentation of the new cashflow forecasts and the impairments on P&L and Balance sheet?
For policy makers, these questions lead to two over-riding issues
Firstly, is the disruption created by the proposed changes likely to crash the auto-enrolment bus.
Will the consequences to insurers and their distributors so damage the financial services industry that the collateral damage is unacceptable?
As far as those depending on the legacy of work over the past 25 years goes, the answer to both questions is “no”. If we are to work under the rules of the old paradigm then we should not be considering scrapping trail, removing differential pricing or capping costs within defaults.
But this is 2014 and the new paradigm. It is a world where the DWP are armed with a report from the OFT that demonstrates a dysfunctionality in the distribution and provision of workplace pensions arising from weak buying and poor practice on the sell-side.
Frankly, if you embark on a “full frontal attack on charges”, you expect casualties and you don’t take too many prisoners.
In the new paradigm of 2014 the issues issues surrounding disruption to the old are re-cast as issues surrounding the construction of the new. What needs to be in place to ensure a smooth transition, not what waste will be left behind.
I say this with some confidence as I have been knocking around Government circles this autumn and I see a total absence of any sympathy for insurers or advisers whose businesses are built on commission, differential pricing and high default investment costs.
Instead I see interest in insurers such as L&G and the Mastertrusts who are opening their doors to new business resulting from a migration from the old provider to them.
But this is not the best way. L&G and the Mastertrusts have good products it is true, but so do the insurers who have relied on commission and AMDs and high default investment costs.
Preferable to the business of transferring hundreds of thousands of individual accounts from one provider to another, is to simply upgrade from old to new. Which is what L&G are urging their existing customers to do and what the likes of great insurers like Standard Life, Aviva, Scottish Life, Aegon, Scottish Widows and Friends Life must do.
If they will not allow internal upgrades to their legacy books, they need to accept that those books will be at best closed to AE contributions and at worst, transferred lock stock and barrel to providers who offer AE compliant workplace pensions.
In order for this process to proceed as smoothly as possible, there is going to need to be a lot of good quality information in the market, explaining the options to employers and allowing employers to make informed choices.
There is insufficient resource within providers to do this on their own, they will need the help of the advisers and my guess is that many advisers will not help unless paid to do so. The question of who pays to implement changes that are beneficial only to members is a moot one – especially where a cost cap on member charges has just been imposed.
The obvious answer to the question “how do we minimise the disruption of the changes on which the DWP have just finished consulting is “digitally”. There may not be an app for all this just yet, but there are certainly technology solutions that can allow the information needed to make informed choices to be generated automatically , distributed digitally and acted on with the click of a mouse.
There will need to be clear links to the source of this information and there will need to be a range of on-line tools to allow employers to consider their options for themselves. Helplines may help but ultimately, the transition from old to new will need to be a self-served operation.
Rather than run from the new technologies, insurers will need to embrace them. So too should those advisers who , rather than throwing toys out of the pram, choose to continue to operate in the new paradigm. Cutting the umbilical to trail, taking the hit to the P&L and Balance Sheet will be the necessary pain but the upside will be an environment in which advisers will be operate with pride and authority.
As you can imagine, I am determined that both First Actuarial and http://www.pensionplaypen.com play an important part in transitioning from old to new and are at the vanguard in providing the technology that minimises disruption from pension reform.