As the hoards gathered for the 44th consecutive Pension Play Pen lunch, a sneakye-mail snuck its way into my inbox. It was from Aisling O’Driscoll.. the acceptable face of DWP auto-enrolment regulation

Putting aside my deep intellectual admiration for Aisling I opened the text and this is what I read…

Following his statement on 10 May, the Minister for Pensions has today laid draft regulations before Parliament to ban consultancy charges in automatic enrolment schemes. I have attached a copy of the regulations and the Minister’s statement to Parliament. 

The regulations are draft at this stage as regulations made under this power must be approved by each House of Parliament before they can become law. We expect debates to take place in October and, subject to parliamentary approval, for them to come into force by November 2013 at the latest. 

The regulations do not define ‘consultancy charge’ as such or advisors, but instead set out the type of arrangements which, if present in a scheme, will prevent it from being an automatic enrolment scheme. The main risk associated with consultancy charging stemmed from the mechanism by which the charges were agreed between employer and adviser and paid out of the scheme to the adviser. 

Under the draft regulations, a scheme providing money purchase benefits which contains a provision allowing amounts to be deducted from a jobholder’s pension pot or contributions will not be an automatic enrolment scheme if that amount is to be paid to a third party under an agreement between the employer and the third party. The definition of third party excludes trustees and providers. 

These regulations will not affect pension schemes where there was a legally enforceable agreement in place between an employer and a third party before 10 May 2013. This is a recognition that where agreements were made before the result of the review was announced, the employers and schemes involved will need time to review their arrangements in an orderly way. (my highlight)

We intend to include proposals to extend the prohibition on consultancy charges to all qualifying schemes in the Department’s broader consultation on charges planned for the Autumn. Regulations could be introduced using the power in clause 35 of the Pensions Bill, subject to the successful passage of the Bill currently before the House.

I read this as saying some pretty dynamic things

1. The regulations are not just  banning consultancy charging, they are banning DC Schemes “which contain a provision allowing amounts to be deducted from a jobholder’s pension pot or contributions”.

2. We seem to have abandoned QWPS and repaced it by “auto-enrolment scheme” which is a bit easier (I hate doing capital Q’s , it hurts my little finger).

3.There appears to be an impulsion on employers and providers to review arrangements set up befcore 10th May (which presumably have amounts deducted from member pots going to advisers).

I don’t know if the industry is in shock, or is in denial or whether I am reading this all wrong. But if I am right, this looks like a pretty clear indication that the DWP are going to intoduce compulsion or impulsion in the autumn the impact of which will be that AE schemes will need to be stripped clean of Japanese Knotweed (sorry commission).

Unless a lawyer can prove to me that commissions are not “charges agreed by an employer and adviser and paid out of a scheme to an adviser”, then I assume they are not to be allowed into the AE fold.

Of course there being a legally enforceable contract  in place , schemes established before May 10th initially appear “off the hook” but the obvious implication of what follows is that there will be impulsion on the employer and scheme (provider) to review what has happened “in an orderly way”.

So we won’t all jump at once, but the message is clear, the death bell tolls…

Which makes for a pretty big change to the way insurance companies cost their products, IFA’s value their businesses and employers operate their workplace pension plans.

This would be a  vindication for firms that worked on transparent fees charged to the employers and did not take the insurer’s shilling and “sell now while commissions lasted”. It is also a vindication for consultancies who did not charge for investment consultancy on defaults through fund expenses.

This is not me crowing or being wise after the event. I wrote several times last year that I thought these risky strategies and I advised anyone prepared to listen of the risks of loading the AMC and charging members for what should be considered business expenses.

For the sake of completeness, I attach the text of the accompanying  Statement.

Written Ministerial Statement

THE DEPARTMENT FOR WORK AND PENSIONS

Pension charges

The Minister of State, Department for Work and Pensions (Steve Webb): I am pleased to announce that later today we intend to lay draft regulations to prevent the use of consultancy charges in automatic enrolment schemes. This will apply to both personal and occupational pension schemes providing money purchase benefits.

Under the draft regulations, a scheme with a provision allowing amounts to be deducted from a jobholder’s pension pot or contributions will not be an automatic enrolment scheme if that amount is to be paid to a third party under an agreement between the employer and the third party.

These draft regulations will not affect pension schemes where there was a legally enforceable agreement in place between an employer and a third party before 10 May 2013.

In my statement on 10 May 2013, I announced the Government’s intention to publish a consultation in the autumn following the publication of the Office of Fair Trading’s market study on charges in defined contribution workplace pensions. As part of this, I intend to consult on extending the prohibition on consultancy charges to all qualifying schemes. Regulations could be introduced using the power in clause 35 of the Pensions Bill, subject to the successful passage of the Bill currently before the House.

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