There are more than 10,000 employers who are running saving schemes for their staff as qualifying workplace pensions.
The introduction of minimum standards for these schemes in “Better workplace pensions, further measures for savers“, begs the question – who is going to upgrade those schemes that don’t meet these standards.
I began writing about this problem in the summer of 2012 when I attended a seminar where the IFAs were suggesting that by establishing a commission scheme prior to the introduction of RDR (which banned such schemes) employers could “pre-pay” for corporate and individual advice and bill the cost to the DC pots of staff entering the scheme.
I was shocked that the majority of employers in the room seemed quite comfortable with this idea and said so. Never mind the dirty looks and legal threats I got, that’s history now. It was short sighted at best and brand ruinous at worst, for IFAs to follow commissions over the cliff.
Over the past twelve fifteen months, Steve Webb has maintained a grim determination to rid workplace pensions of commission and of its accomplice , the active member discount. No commission funded adviser should have been surprised to have read
- The Government agrees with the OFT’s analysis that some charging structures are inappropriate for the automatic enrolment environment.
- From April 2015, no qualifying scheme will be able to contain a consultancy charge structure.
- Between April 2015 and April 2016, any commission payments will be subject to the overall default fund charge cap, set at 0.75 per cent of funds under management, on member-borne deductions in the default funds of qualifying schemes.
- From April 2016, no qualifying scheme can contain member-borne commission payments to an adviser.
The question that remains is who will oversee the orderly transition , not just for those of the 10,000 schemes with commission and/or AMDs and the many thousand more which are intended as Qualifying Schemes, that will not make the grade.
Some IFAs will stick around and help with the transition, but many will simply walk away, why be paid for dismantling the apparatus on which they had built their livelihoods.
Some firms who have booked future commissions into their accounts will have to take an impairment, some may become insolvent as a result.
There is no obvious capacity in the market to pick up this work or any great appetite from employers to pay for it.
The insurers who are responsible for paying this commission are faced with an interesting challenge. The major commission paying life offices interested in AE qualifying schemes are Aviva, Aegon, Scottish Widows and Scottish Life. Standard Life,Zurich and Legal & General have relatively small commission books.
Talking to senior executives of the commission paying offices, it’s clear they are looking forward to turning off the tap and see the commission saved as a shareholder windfall. This is a dangerous thought process, simply trousering the commission suggests that it was only paid to IFAs as a sales incentive and that the customer will get the same service without the IFA. If this is the case it flies against everything life companies have talked about the role of advisers in the workplace.
But it won’t be as simple as that. Firstly there is work to be done in re-establishing the schemes, beyond turning off the commission tap. For one thing the AMDs will need to be removed and this communicated to staff – this may require a price increase for those at work.
Then there is the requirement on the IGCs of the insurers to ensure that the schemes on their books do not have Total Expense Ratios of more than 0.75% by this time next year.
Thirdly there is the need to speak directly to the customers who are orphaned by disenchanted IFAs and replace the customer management that was previously supplied by the adviser.
In her blog in the Spectator, Ros Altmann explains
the so-called Retail Distribution Review ended commission-driven ‘independent’ advice, but the insurance industry continues to by-pass advisers and slip commission to others who can sell their products without any advice or quality checks. It can be workplace auto-enrolment schemes that force workers to pay the costs of setting up their employer’s scheme through ‘adviser charges’ . It can be annuity sales where ‘non-advice’ brokers were rewarded with handsome commissions (or tied deals to sell potentially unsuitable annuities to pensioners). But the flawed commission model has been kept in place – to the detriment of ordinary customers, in too many cases.
If the insurance companies see a windfall from not having to pay out sales commissions then they should be disabused of that notion at once. Some of the savings can be used to employ qualified advisers, paid by salary, to provide customer relationship management to the schemes affected by these changes. The remainder can be used to bring down charges on existing plans, at least to the 0.75% cap and in many cases well below.
But there is still an enormous gap between what is needed and the capacity to deliver. On http://www.pensionplaypen.com we set up a simple modelling tool to help employers establish whether their scheme will meet the minimum guidelines – “Let’s rate our pension”, it deals with governance, administration, charges ,charging structures and more or less replicates the review process that a fee-based adviser would take a client through to ensure its workplace scheme is fit for purpose.
The output of the test is a score out of a hundred applied by the user to his or her scheme. Should the score be below 75, we recommend a conversation with an adviser or if no adviser be found, with the provider.
It may be time to revisit this little modeller!
This post first appeared in http://www.pensionplaypen.com/top-thinking