Does your pension scheme need advice?

WARNING- THIS BLOG CONTAINS A SHAMELESS PLUG FOR OUR SERVICES! (transparent as always!)

I’m travelling up to Nottingham this morning to talk to Employers and Trustees who are asking themselves “Does our pension scheme need advisers”.

Meeting similar groups recently, the answers I’m hearing divide into three

  1. Some are happy with what their adviser is doing, are aware of the costs of the advice and believe they are getting value for money -STET!
  2. Some  have lost their advisers either through business failure, a change in strategic direction (the adviser doesn’t do corporate pensions anymore) or because the adviser’s walked away from what he considers  an uncommercial arrangement.
  3. Some  are fed up with their adviser and either want a new one or feel they’d better off dealing with their provider direct.

If you have responsibility for running your company‘s pension scheme, I bet you’ve probably been round this loop a couple of times.

Let’s establish the facts; companies do not need to have pension advisers, they can deal directly with providers (this is known as “direct offer”). If they do so, the terms their members get should reflect the fact that no commissions are being paid to a third party for advice. Companies cannot take commissions from insurers to advise their staff unless they are registered advisers.

From the beginning of next year, the practice of taking a commission from a provider for selling a pension will be replaced by the payment of a “consultative fee”, paid by the provider. It’s yet to be tested whether these consultative fees will improve the quality of the service offered by the adviser but the idea is that the sponsors of pension arrangements will be able to control the fees being paid to advisers better than the old commission system.

These consultative fees will only apply to work done for new pensions established. We expect that most people in works pensions where commissions are being paid, will continue to be charged for their advice in the old way unless their company takes positive steps to either move to them onto new contracts with “consultative fees” or ditches advice and sets up directly with the provider under “direct offer”.

The situation’s not unlike buying a house (or in this case a number of houses). It is possible to buy a house without using a solicitor but the majority of purchasers will pay a fee to make sure that they don’t come a cropper in a big way – the solicitor’s fee is akin to an insurance premium.

I get the argument that when you buy a house or set up a pension, you use a solicitor or an advisor, but I don’t get the idea that you continue to pay the solicitor for as long as you own the house, nor do I get the argument that you continue to use an adviser just for the sake of it.

Which brings me back to my friends in Nottingham. Their particular beef is that they don’t get any ongoing service from their advisers. The only time they see their advisers is if there is a new member who is likely to generate some new commission, if he or she signs up to the plan.

But my friends in Nottingham don’t want or need anyone to sell these pension plans in the future. Soon they will be auto-enrolling their staff into a pension plan and the questions staff will be asking will not be “should I join” but “should I quit”. That question is important, needs advice but not a sales pitch. Helping people work out the arguments on both sides (cashflow v long term needs) is really important but it is not a conversation that most advisers are used to having and its certainly not a conversation that most employers are going to pay for.

If the adviser is going to be retained, he or she is going to have to prove their worth in helping some people take the “opt-out” decision and help the majority of people make the best of what they’re getting when they “stay-in”.

At a member level an adviser is a nice to have but I suspect that finding advisory firms with the people who have the skill sets to do the kind of work needed post auto-enrolment is going to be hard. Getting a budget to pay for them from the company harder and getting members to accept that a decent chunk of their pension contributions are diverted to these guys as consultative fees – hardest of all.

I believe that the bulk of advisory work conducted over the next five years will not be with the members of these auto-enrolled pensions. Instead it will be on a business to business basis with the sponsors of the plans and it will concentrate on a triple agenda

  1. keeping the employer on the right side of the various pension regulators
  2. Making sure the contributions of employer and employees convert to the best possible pensions down the line
  3. Making sure that employees value and engage with the works pensions so the company’s spend, including its advisory spend is not money down the drain.

In a B2B world, fees are paid to business by businesses for services rendered, the fees are open and reasonable- if they aren’t they don’t get paid (for long).

So the new advisers are going to have to be a lot more adept about how they charge for their services and wise up to the big bad world of corporate procurement.

Procurment people will ask “do I need an adviser to help us do “this and I am quite sure many will answer the question “no”.

Justifying a B2B budget for pensions advice where historically these costs have been paid through comissions by members is going to require some education of those who guard corporate budgets by those who understand pensions.

If you think through the business case for spending money on an adviser, I reckon there are only three cogent arguments.

  1. Helping clients stage auto-enrolment and stay compliant in its operation
  2. Ensuring that the Regulators 5 steps to good DC outcomes are properly followed
  3. Ensuring that employees know what they’re getting and how to make the most of it

(I am ignoring the management of DB which is a complex legacy issue in a seperate box).

If you are setting out to answer the question “Do I need an adviser” then these are the three issues you need to test the question against.

If you feel that you can manage your way through auto-enrolment, maximise the value of your contributions and make sure your members understand, engage and appreciate what you’ve done, you have my support and my admiration. You should award yourself a healthy pay-rise as the job is about to get a lot harder.

If on the other hand, this prospect is pants-wettingly daunting, then you need to start getting your ducks in a row. Advisers who are going to be able to do whti work well are few and far between at the moment. I’d like to think I’m one and I’d like to think that my colleagues are others. If you want to have a talk with me about this you can mail me directly at henry.tapper@firstactuarial.co.uk or find my other detials via my linkedin profile.

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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