It’s charges not contributions that are on the “race to the bottom”!

race to the bottom

I’ve been reviewing the 2013 charging options available to advisers using Scottish Widows – “Corporate Pensions; RDR and charging shape options”. The document gives advisers numerous options to pass on fees to members of their workplace pension plans. I wonder whether any of these options will be viable for employers certifying their scheme as “Qualifying for Auto-Enrolment”.

In a speech in December Michael O’Higgins, chair of the Pension Regulator, said

“in our view, workers should not be enrolled into smaller schemes, which do not benefit from economies of scale, tend to be poorly run and do not deliver value for money in the charges they make to members”.

Steve Webb has talked of “dodgy schemes” and warned that the Government could disqualify them or cap charges levied on employees.

For Widow’s advisers, the “charging shape options” are limited in a 1% world…

Group Stakeholder .. will only be available for new schemes on a nil consultancy charge basis. It would be commercially impractical for intermediaries to be remunerated through consultancy charges due to the stakeholder price cap.

But if you can’t get a member charge away within a 1% price cap, how are you going to do so and remain competitive with master trusts charging 0.5% pa?

The traditional corporate pension distribution model was never likely to lay advisers or providers golden eggs but I now struggle to see how any small schemes will have “AMC headroom” to pay advisers through adviser fees or commissions

So the analysts and shareholders of the insurance companies underwriting these charging structures should be taking a long look at their business projections.

Indeed, the numbers of advisers available to “charge” may have dwindled too. Estimates for the fall in advisory capacity in the next two years vary from between 5 and 30% but if “adviser charging” is unviable, 30% may be an underestimate.

With 1.2 m companies due to stage auto-enrolment between now and 2017, the capacity of existing advisors to provide comprehensive installation on traditional lines was always in question. Governmental intervention looks likely to accelerate the need for change in the distribution model.

It is highly likely that new means to select and implement corporate pensions will emerge in the next 24 months that will enable companies to self-serve group pensions and by-pass current distribution channels.

With new technologies to hand , we can expect to see that “race to the bottom”. But where we thought the race might drive down employer contributions , it looks more likely to drive down member charges. This must be to the long-term benefit of pensions but as “the bottom” is likely to closer to NEST than Stakeholder levels, it leaves little scope for traditional “advice”.

The Regulator is starting a consultation in January which we hope will clear up what level of charge will meet the Government’s quality standards. In the meantime , it will be a brave employer who banks on being able to include the operational costs of auto-enrolment in a member charge or considers that schemes with pre 2013 commission based charging structures will be nodded through at checkpoint Brighton.


About henry tapper

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