We have scotch’d the snake not killed it- Macbeth

Two years ago I took on a company who wanted me to advise them on their workplace pension. They had an existing adviser who they hadn’t seen in over a year and was not responding to their calls.

It turned out that the adviser was  being paid a substantial sum every time someone joined their group personal pension arrangement and the company wanted to get something for these payments.

The company wanted me to take on the advisers role but be paid by the commissions but I could not do this, we will not take commissions on this basis.

I suggested instead that we negotiate a new arrangement with the provider so that members paid lower fees and the company decided what it wanted to pay me going forward.

Unfortunately, though the provider was happy to pay commissions to the adviser (who was still around to receive them) , they were not happy to reduce the amount being taken from member’s pots.

The company was faced with Hobson’s choice;

1. Cease paying into the old GPP and establish a new one on better commission free terms
2. Stick with the old GPP  in the knowledge they were paying over the odds
3. Force the old adviser back to do the job it was being paid to do

In the end the company got sick of the issue. The Directors had made their own provision and we are now in the uneasy position where the company is reluctant to pay fees to improve the old plan or pay commissions to the absent adviser. It is now reluctant even  to contribute to the plan, knowing the members are not getting value for money.

If the company ceases contributing, the members will suffer, but who is really to blame?

I am afraid it is a case of the financial services industry shooting itself in the foot by being lazy, greedy and inflexible. Worst of all, it’s a case of putting the customer last.

These dilemmas are not unusual. I wrote a blog on May 5th 2012 highlighting this very issue. You can read it here.

The train-crash I predicted would happen, did happen and nobody yet has started the heavy lifting to get the survivors out.

James Colegrave at Towers Watson commented to Professional Pensions

“consultancy charges are the most transparent of a number of charges levied by advisers and therefore the ‘easiest to target’.

In the past some pension providers felt they needed to pay commission to advisers to win business from employers who did not want to pay for advice themselves. Charges paid by members would be lower today if providers did not need to claw this money back.

Commission was banned as a way of financing new advice from the start of the year, but it’s not dead yet.”

I’d only disagree in the statement that commission is not transparent. It is transparent, it is declared on every key features statement issued to members.

I am quite sure that Steve Webb is choking on his corn flakes (if he’s reading this) and spluttering

“you try retrospective legislation to ban a system that you saw operating under your nose. I saw the trains, issued the warnings and still they crashed!”

The fact is that advisers like the one in the example above have been establishing GPPs over the past three years in the full knowledge that commission would be banned from January 2013 but in the certainty that their future income was future-proofed provided that the “commission-rich” GPP’s they set up then, continued to be funded by employers.

All the advisers needed to do was to make promises. They did not have to keep them.

There are thousands of companies out there with commission based GPPs. Some of them are getting a great service from their advisers who are delivering the services they promised. But many of the advisers are now out of the business and some are absent without leave, having decided they can take the income and not do the work.

Steve Webb cannot do anything about this. It happened on the FSA‘s watch, the FSA knew it was happening and have passed the problem on to the FCA. The FCA are working with the Office of Fair Trading and we can only hope that the OFT report due in the autumn highlights abuses such as the one I mention.

There is a catch-all set of prudential regulations known as “treating customers fairly” which were established by the FSA before it disbanded. These rules require , among other things, for advisers to do what they say on the packet.

It is regrettable that the main difference between a 2012 and 2013 GPP is that the 2012 model has a “rip-off loophole” which advisers can crawl through at any time in the future.

Steve Webb has more lawyers on his staff than he can shake a stick at and I’m sure they are pointing out to him that the risk of going after this commission outweighs the political advantage. If he plays his cards right, he gets his Regulator talking to the Treasury’s FCA and with a nifty pincer movement, they find a way of making commission inoperable.

There are ways that this could be don. Most easily they could use the “comply or explain” principles to ensure that advisers being paid out of the member’s fund, have to show that the commissions they receive have been earned and are not a way of financing their business. This could involve time sheets signed by the adviser and verifiable by the employer.

I’m sure this would be most unpopular with advisers, but it would put those who work and paid on commission on a level playing field with advisers such as James and myself who do measure our fees by the time we spend doing the work.

In time, if the cost of the work done by the adviser is less than the commissions taken, commissions could be reduced and of course vice versa. The employer could control the process and advisory fees could be something that formed part of a governance review. This is not fanciful, it is what happens with all our clients.

However it is extremely unlikely to happen voluntarily. What is more likely to happen  (unless the FCA bears its teeth) is that employers will savvy up on all this and say enough is enough.

This week I launched a website which allows employers to go straight to a leading GPP provider and get terms of 0.48% pa. They do not have to pay an adviser to get them nor do they have to be of a certain size or have a certain average salary of be a young demographic.

They only have to agree to pay the minimum auto-enrolment contribution on the scale of their choice.

The employer in the case study is still paying 0.75% -more than 50% more than it needs to (for a comparable product). The cost of that 50% fee hike will only be experience at retirement , but it could be massive

The answer to the problem rests with people in workplace schemes, waking up and smelling the coffee.

Let’s hope that we can get people getting and standing up for their pension rights.

Related articles

• Steve Webb’s water-cooler moment (henrytapper.com)
• Pot noodles member (henrytapper.com)
• A momentous day for restoring confidence in UK pensions (henrytapper.com)
• Everybody need standards (henrytapper.com)
• Those Dutch Pensions – a Civil Servant writes (henrytapper.com)
• End of pension fund rip-offs (express.co.uk)
• Pension pots ‘saved from charges’ (bbc.co.uk)
• Rip-off company pension fees which run to thousands of pounds axed for 11 million workers (thisismoney.co.uk)