RDR and AE – what future for commissions and advisor-charging?

pcadvisorEvery week we get a few more enquiries from concerned employers who are being told by their pension advisers about the changes coming next month from the Retail Distribution Review.

There is variation on the theme but the overall message is clear.

Pensions “advice” is  not free

…..even though many employers have been getting a free ride on the pensions “advice” given to them and their staff.

From January 1st, new pension schemes which pay advisor’s from the member’s funds will show an explicit deduction from the member’s account. That deduction will need to be justified both to the member and the employer in terms of “services rendered”.

Pension arrangements in place before 1st January 2013 which instead of the explicit deduction , have an increased annual management charge to pay for commissions to advisors will still be able to “get away with” not disclosing the impact of the commissions either in terms of the increased annual management charge or the decrease in pension that these higher charges bring.

This is the deal struck between advisers and the Financial Services Authority. We know of at least one household name that is preparing to auto enrol in the next six months into a group of personal pensions which pay their advisors commission. The vast majority of these personal pensions will be set up at staging.

We think that the practice of getting members to pay for advice is fraught with risk.

  • Risk that members and/or unions will object to having to pay for something that may not benefit them
  • Risk that the Pensions Regulator may deem the advisor fee or the increased AMC as “not for the member’s benefit” and disqualify the pension as an auto-enrolment vehicle
  • Risks from conflicts, the “advisers” to the members are typically “advising” the company; any broader conflicts policy within the organisation is likely to pick this up.

For larger companies with complicated payrolls, multiple employment contracts and sophisticated HR systems (flex), installing an auto-enrolment process is likely to be tricky and needs skill, experience and technical resource that won’t typically sit in-house. Going to advisers to get this is sensible.

Smaller companies that may have less complicated needs may be able contract directly with providers- indeed they may have to (there being so many of them!).

But whether big or small, there is a real question as to whether members need advice on auto-enrolment ; information- yes…. but advice? They probably have greater need for advice on how to use their mobile phone!

Quite often, the costs of installing group personal pensions and integrating them with existing business architecture has been bundled with “advice” and charged to members through commission. While this seems a little less than open with employees, we don’t see it crossing into bad practice – let’s just call it “acceptable”. After all , any pension spend by the employer at present is discretionary – why shouldn’t they do what they like with discretionary spend.

But when the spend (eg contribution) is not discretionary , but paid to comply with the law of the land, the ethical, moral and legal boundaries change. If the employer’s costs of complying with auto-enrolment are taken from the minimum contributions paid by the employer to comply with regulations, those costs are actually reducing the impact of those statutory contributions below the minimum threshold.

And whether the advisor’s are being rewarded through a fee being taken from the member’s account or a share in the fund the member is accumulating (which is how the commission system works) is immaterial.

The practice of loading AMCs to pay for the member to pick up employer costs is a risk too far for employers contributing at or about the minimum AE contribution scale. We are not saying it is illegal – though it may become so – we are saying is that it is so risky a way of doing things, that employers should stay clear.

The DWP are quite explicit about their powers. They consider they have the power to dis-qualify a pension plan that operates in this way from Qualifying for Auto-Enrolment. Let’s imagine what this would mean in practical terms

  • Your company would have to renegotiate terms with its provider
  • It would have to re-disclose to members the new basis of the plan
  • If contributions had already been paid, it would have to re-establish without member detriment those contributions on the new charging structure
  • Deal with the confusion created with members
  • Deal with the unwanted publicity from the pension trade press and possibly national press
  • Explain why this came about to wider stakeholders including internal Governance committees , shareholders and external bodies.

Is it really worth the risk?

Many advisers are withdrawing from advising on corporate pensions either because they see their skills better employed elsewhere or because they simply don’t want to trade in the new environment. In such cases “business as usual” means employers dealing with the provider on un-discounted terms but without the support which is still being paid for by members – this is “worst case” scenario.

Some advisers are offering the opportunity to work on a pure fee basis. They are converting themselves into the fee-charging model that the actuarial and accountancy based consultancies have always operated.

But there are many advisers who are hoping that they will be able to carry on , as they have always done, because they are advising on group arrangements which have commission inside and can be expanded to cope with the hump of new joiners under auto-enrolment.

In our opinion, the recent pronouncements from the DWP mean that at the very least, companies should be re-modelling any financials based on minimum contribution tiers to include advisory fees paid on top of rather than out of the contribution. In our view, where the advice is to use a scheme which does and will pay commissions, the company should model  using  a proxy for the advisory fee that the commission replaces. Though there is no actuarial standard for this, a conversion factor can readily be established, agreed and applied to create this proxy fee.

Once companies have done this modelling, they can make a decision  on whether to risk dis-qualification and simply pay at the minimum into the existing plan, pay a discretionary amount above the minimum (with all the complications for payroll that this calculation requires) or abandon advisor charging an/or commissions and set the scheme up on a “clean” basis.

There is going to be a lot of contention here, it is not just the advisers who stand to lose, it is the insurers with legacy books , much at high margin , which some anticipated would pick up many eligible jobholders by default.

It’s good to see some providers , notably AVIVA, stating that they will not allow more expensive legacy contracts to be used for auto-enrolment. However, we shouldn’t underestimate the scale of the “pension re-write” that will need to take place if we are to move – even over a five year period – from our current state of non or poor provision to a new world where pot can follow member because every pot is properly washed up.

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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