Buy now while IFAs last?

I went to a seminar given by an IFA active in setting up corporate pension schemes for small and medium-sized companies. These are the kind of schemes the Government are relying on to manage the contributions of millions of new pension savers.

One speaker explained to an audience of small company executives that the  system that paid for education and promotion of these schemes was about to go;- as a result of Government intervention.

He explained that the practice where the insurers paid the IFA for promoting their schemes and educating a company’s staff was on its way out. The implication was that the member was going to have to pay directly for this by way of a fixed monetary amount which “with all the other things on their plate” the member wouldn’t do.

That was the bad news. The good news was that companies had between now and December 2012 to take advantage of the insurer’s generosity and to build up a huge bank of communication credits that would make sure their members received proper education on pension matters for the foreseeable future.

Those of you smart enough to question why insurance companies would want to give large amounts of money to IFAs may be feeling a little sceptical and with reason.

The educational and promotional payments are in fact commission. This commission is paid by raising the charges on a pension. The impact of those charges is felt not now but when the member of the pension retires and that impact can be enormous.

I hear anecdotally that this “buy now while stocks last” pitch is a regular feature of such seminars . I should add that some IFAs never embraced the commission model , many have already moved away from it and most have accepted that the commission model will die from 2013. Nonetheless, the next 15 months are going to see a spike in commission selling of this type

So whether covertly or overtly the member pays . The only difference is that when a company sanctions commission the member doesn’t have a choice. There is of course a third way, where the member is neither charged an overt or covert fee but the company deals directly with the insurer, or in years to come – with NEST.

At the same seminar, it was stated that what a member gets out of a personal pension depends on how much gets paid in, how long the money is invested and the investment return the member gets. This is not entirely true; the amount a member gets as a pension when he or she retires also depends on the conversion of a pension account into a lifetime income and the amount taken out of the member’s account in charges.

Over 40 years , taking an extra charge of 0.1% pa from a member’s account makes a difference of 5% in lifetime income.

A pay cut for life of 5%.

But 0.1% pa is nothing compared with what many members whose pots are being charged for “education and promotion”. Typically (and I’m grateful to Legal and General‘s Adrian Boulding for this number) the impact of the education and promotion is 0.5%.

That means that these advisory fees are costing members up to a quarter of their retirement income. The situation can be even worse for job hoppers who are typically paying even higher charges on pensions they joined with previous employers.

If you were asked to take a 25% pay-cut you’d be asking what you’d be getting in return.

But no such enquiries seem to have been made.

This is why the Government have determined to close down this system of “closet” charges. The Retail Distribution Review (RDR), which has dragged on for  several years, will require advisers to charge for their services not from a seemingly small charge on the fund but from an agreed monetary amount.

 Typically IFAs will be charging £300 to you to promote the company pension scheme and educate you on how you should use it. What’s more you’ll be asked to pay that £300 each time you enter anew scheme (and you’ll be auto-enroled into these schemes in year’s to come)

Not surprisingly, many IFAs have worked out that not so many people will be prepared to pay a flat amount. Indeed many companies won’t let their staff be charged that amount.

The charges for people joining workplace savings schemes after the introduction of the RDR should be a lot lower, the pensions a lot higher. Except if you joined a commission paying scheme before 2013 – where you are stuck with higher charges – at least till you leave to join a new scheme.

IFAs argue that taking them out of the equation introduces new risks.

When you ask what these new risks are, the answers tend to centre on people not contributing enough into their pensions and secondly on them taking the wrong investment decisions.

I’m in pensions so can’t speak for the average person. But I sense most people  are able to prioritize savings when they need to and they don’t need to pay an IFA to take a decision to save or to use a default investment option.

The introduction of auto-enrolment will make it very difficult for most of us notto save into a workplace saving. It may not need us to save as much as we need to but for most of us at least 5% of our wages will be going into a pension very soon. They will be going into a default fund designed to be a proper choice for the majority of savers.

People who pay that much into a savings plan (and you’ll get at least 3% more from your employer) will expect to see that money work as hard for them as possible.

I expect that the majority of pension schemes set up post 2013 will be set up directly with insurers or with NEST or some other collective provider. IFAs will have a place in the process but they will be paid by the employer and not the employee.

However, and this is a big “however”, people who are required to save into a plan set up by an IFA on a commission basis before January 2013 will be stuck with a plan with higher charges, charges that could cut their pension by 25%.

So if you are a corporate pensions procurer, before you rush to buy now while advice last, you might like to consider whether your staff are going to thank you for rewarding your IFA at your staff’s cost.

 You might like to ask the IFA just what education and promotion staff are likely to get post RDR and ask your staff whether they are ready to give up a quarter of their pension to buy the company a bank of communication credits.

There is an alternative, you can contract directly with an insurer or NEST or with other mastertrusts. You need independent advice on how to go about this. There are firms that offer independent advice to employers and I work for one. 

IFAs can and should be operating in this space but to do so they need to leave behind the conflicts created by commission and do so now and not in 2013. 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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