Someone told me yesterday that he preferred ISAs to pensions because he knew what was going on with an ISA.

He’s not stupid, he’s financially literate but it turned out he knew nothing about annuities  and he asked that I blog a bit about what pension people think of as motherhood and apple pie but is total gobbledygook to everyone else.

Tomorrow I’ll write about annuities but today I’m thinking about transferring personal pensions. Whatever confusion he’s having with changes is mirrored

That’s because we’ve been asked by a number of companies to sort out their group personal pensions that have “gone wrong”.

The common thread with all the employers is that they employed advisers to set the GPPs up and those of advisers are no longer advising. Either they’ve gone out of business, or they’ve withdrawn from advising on GPPs or they simply do a rubbish job.

The trouble is, whether the advisers show up or not, the charges in the contracts the staff took out, remain unchanged. No performance related fees here!

Three questions are being asked

1. What are staff paying for this advice?
2. What does that mean in lost pension?
3. What can we do about it?

To which the answers are typically

1. Members are paying between o.25% and 0.5% per annum of their fund
2. To make up for the impact of this charge a member would need to pay between 1 and 2% of salary extra into their pension
3. Companies can do something about it but it’s not clear what’s best.

It’s that final point that is causing consternation. Most employers with GPPs know that two things are about to happen. The first is something about RDR about which there is a lot of noise but no understanding and the other is about Auto-Enrolment about which there is a lot of noise and very little certainty.

It would have been helpful for employers with GPP if the RDR and AE were happening at the same time but they’ve been moving apart like tectonic plates and they will now happen years apart.

So I’ll try to make things clearer and I’ll come back to what can be done to make things clearer at the end.

The RDR will mean that advisers charging commissions on GPPs they set up for employers will have to make it absolutely clear what they are being paid and get that agreed by the employer before setting up pensions for new members. Existing members will see no change in their charges.

Auto-enrolment will mean that advisers no longer have to sell members the idea of joining the pension plan as they will join automatically, they might have to sell them the idea of staying in the pension plan but that’s a lot easier.

A common complaint about GPP advisers is that they are only ever seen when there is someone new to enrol into the plan and they don’t provide ongoing advice – that’s what the employers that speak to us say anyway. Having sold GPPs myself, I know that the only thing I got paid for was enrolling people into the plan, I got a commission. This may account for the GPP adviser’s behaviour.

This is how the conversation goes…

So the adviser isn’t really an adviser, he’s a mutton dressed as lamb salesman,

 – but I think you knew that already or you wouldn’t be talking to me. And now that I’ve told you , Mr Employer, that all this selling is costing your members 1-2% of their pay you and now that fairly soon you won’t need any enrolling, you are asking me to get rid of these salesmen and the nasty commissions that are eating into your staff’s pensions? Well aren’t you?

Yes but you can’t tell me how and that’s what’s frustrating me.

This is the frustration! There is a simple way of getting change. The employer just stops paying contributions and tells staff they have to enter into a new contract to get any more money from payroll. This is disruptive to staff, to productivity and frankly is wasteful of insurer‘s and our time. It is like cutting down a half grown tree and planting a sapling beside it.

There is an alternative which we would much prefer. The members stay with the same contract and the charges are reduced by however much the insurer had allowed to pay commissions to the salesmen (sorry advisers). This sounds simple and fair as the advisers shouldn’t get money going forward unless they are advising and the company wants them off the premises.

The insurers are not at all keen on this solution. There may be a number of reasons for this.

• sometimes the insurers have prepaid the advisers more commission than they can afford from the charges levied and are relying on future contributions and future charges to balance their books. This process known as back-end loading is usually tied up with a practice known as “active member discounts”. These discounts are their for people at work, as soon as someone leaves the employer, the charges on the plan go up, the higher charges allow the insurer to get back the unearned commission (at the expense of the ex-employee). Take out the commission load on all members and the insurer has lost his means of getting his commission back.
• Another reason that insurers are uncomfortable about switching off the commissions is that they haven’t worked out what happens next. Insurers still rely on advisers to be their postmen and though those that are still open for new business are able to deal directly with employers, most of those that have withdrawn from selling new GPPS- haven’t.

What is needed, and needed soon, is clarity from the insurers – Zurich, Friends Life, Scottish Life, Standard Life, Legal & General, Aviva and Scottish Widows who ar ethe principal “men still standing” on whether companies looking to deal direct can do so, and if so, whether contracts can be renegotiated to reflect non-commissioned terms.

There remain a number of obstacles besides this fundamental question

• can  members can be switched to non-advised arrangements without their consent?
• will accumulated funds “loaded” with commission based fees transfer to the new “unloaded” deal direct fees.
• will insurers seek to charge employers for support (that was supposed to have been supplied by the IFA payroll, staff meetings etc)?
• will the employer pay a fee-based adviser to set up replacements for the services that were to have been provided by the commission based adviser (but typically weren’t)?

Now I anticipate this blog being read by quite a few advisers who by now will be quite hot under the collar. This blog is not saying that commission is bad. It is saying that when commission is taken and nothing delivered in return – that is bad!

I hope that a few insurers will read this and comment. If you are an insurer and you’ve got a clear policy on this – and I’ve missed it – my apologies please drop me a line with a link to the policy (henry.tapper@firstactuarial.co.uk). or make a comment on the blog so future readers can refer.

I return to the start of the blog, if I, a fee-based adviser, am not clear about what is going on post RDR then we can be sure employers and members won’t be. The current uncertainty is not good, we are only months aways from January 2013 when all this kicks off.

 We are sure we know what our clients should do and wish we knew how they should do it!

Related articles

• Top News! – Scrap national insurance on your pension payments! (henrytapper.com)
• Auto-enrolment – winners and losers. (henrytapper.com)
• Search “my pensions”! (henrytapper.com)
• The NAPF point the finger at the £1bn annuity scandal (henrytapper.com)
• Why we shouldn’t give up on pensions. (henrytapper.com)
• Don’t kid people that pensions are easy (henrytapper.com)
• Pension Corporation points the way to “ambitious pensions” (henrytapper.com)
• Employees ‘plan to work longer’ (premierlinedirect.co.uk)
• What have the Australians done for us – not much! (henrytapper.com)
• 500,000 pensioners who will get no help from the Government. (henrytapper.com)
• Who pays for a register of pensions? (henrytapper.com)
• The 500,000 retirees abandoned by the Government (henrytapper.com)
• The Spurious Certainty of Chicken Licken (henrytapper.com)