What to do about commission

commisionDebbie O’ Donovan who blogs as DOD has written a definitive comment on commission and the shameful shenanigans of Q4 2012 which saw advisory firms filling their boots at the expense of the members of workplace pension schemes.

Many years ago a good friend, who at the time worked as a financial adviser, gave me a piece of advice: “Always pay fees for advice, never opt for commission – fees are ultimately a fraction of the cost of commission.”

Last year we saw a tremendous flurry of activity before commission payments on pension plans to corporate advisers was scrapped on 31 December. Many employers were convinced to switch pension providers so their adviser could have a last gasp grab at a hefty commission.

This dreadful practice often found employers, and certainly their staff, unaware of the true costs of their scheme to the extent to which some even believed they were getting their scheme for free. It is especially damaging because commissions are taken out of contributions, greatly eroding employees’ long-term investments.

Any pension schemes put in place under the old commission system now have an added burden to bear (and fear).
Contracts signed before 31 December 2012 have until May this year to implement them. Advisers who put them in could well be loath to recommend any changes that will stop ongoing (trail) commissions being paid out. Many in the industry are, consequently, concerned that these schemes and their investment funds choices will grow old and dated (see also Governancevacuumforcontract-based pension schemes).

A good place to start is by having a good pensions governance committee at your organisation so the full burden does not just land on HR.

Be aware, and be wary – this is a potential misselling scandal, especially if employers auto-enrol staff into a scheme that is not (on an ongoing basis) the best it could be.

But there is something very interesting going on with this story. The commissions that are paid by insurers to advisers for pensions business are effectively an advance against future service. They are a financing arrangement where the insurers take a bet on the persistency on their fees and have no recourse to the adviser if they can’t recover this advance. Advisers who take pension commissions are in a no-lose situation.

By contrast, advisers who make their fees from the sales of funds outside of pension wrappers do not get financed. They get paid “on the drip” and if the tap is turned off, so does their revenue. Which is why the following story is so astonishing.

The Financial Services Authority is planning to ban  rebates on legacy business  which are paid by fund groups to platforms from 2016, in a move which will shake  up the platform industry and force providers to charge groups for additional  services.

Investment Week can reveal the FSA intends to stop platforms  retaining rebates from fund groups on legacy business, and is giving them a  two-year grace period to migrate clients  on to new fee arrangements.

The new rules will be revealed officially in the near future, most likely in  the upcoming platform paper. They will kick in from April 2014 when the new  platform rules come into force, meaning groups will have to stop taking fund  manager rebates on legacy business from April 2016.

So while the pension advisers are invulnerable, the rest have to justify their fees year after year. Small wonder that people distrust pensions.

The point that is made by DOD is , in the context of non-pensioned platform fees, doubly valid. The behaviour of advisers in the second half of 2012 was blatant and shameless.

The reality is this. Companies that bought commission loaded workplace pensions in 2012 and are due to put their members into them in 2013 are doing it on the cheap.

The impact of all this commission paid out to advisers won’t be felt till those joining pension schemes retire, by which time any accountability will be gone.

This will not be sorted by advisers holding up their hands, nor employers holding up their hands, it will be sorted by consumers working things out for themselves. But will they?

Presumably the FSA and the Pension Regulator trust that consumers entering into workplace pensions set up by employers on this basis know that they will be paying the advisers out of their funds. Presumably staff are happy about this.

Or are they paying for the commission like they paid for PPI and pension transfers and swaps; because some clever lawyer who wrote the small print convinced the vendors that they were perfectly entitled  to big fat margins for very little risk?

DOD is right to point this out now, the OFT should be looking into this and asking not just how it happened but why it happened. They should look into the cost of the churning of pensions not just in terms of charges but in terms of the frustration that it is creating among pension experts and the Great British Public alike.


About henry tapper

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