A large proportion of people in pensions are currently going through cold-turkey.
I’m referring to those working for pension providers, advisers and employers who have benefited from commission for the past 30 years and are now finding the commission turned off.
Like junkies deprived their fix, advisers sit listlessly. The workplace pensions they recommended with such enthusiasm in the years leading up to 2012 are now a liability on their balance sheets, banked profits for commissions to be paid after next year must now be written off and be replaced by fees for which there is no certainty of payment.
Insurers, who may benefit in the long-term from not having to pay trail commission, have immediately to write off the banked income streams from AMCs exceeding the 0.75% cap (which from April next year must include any commissions paid. The impact on the commission paying insurers has in some cases exceeded £100m.
But it is employers who are in for the rudest shock. The “free” consultancy they have been used to will be no more. For the costs of the pension advice they have received will no longer be payable by members, it will be payable out of their p/l and its impact will sit on their balance sheets.
Employers have three ways to go. Either they can ditch those nice to haves which they have got used to – workplace pensions advice, clever communications and the odd invite to the adviser’s golf-day, or they can pay a fee commensurate to the commissions given up. If advisers are prepared to drop their commission revenues to a “reasonable fee” then the blow may be softened but there will still be unbudgeted costs.
The third way for insurers is to move to a new adviser. Where no accommodation can be reached with the existing adviser, this may be the preferred approach. We have yet to see whether the advisory community will recover their pension mojo but at present they are showing absolutely no appetite for doing so. The phrase “it’s not about the pension it’s all about the payroll” is as much about adviser’s capacity to make money from auto-enrolment as it is about auto-enrolment.
Of course auto-enrolment is difficult and employers need help with the payroll but it is patently about pensions, that’s where the contributions are going, that’s what staff see, that’s what they were telling employers from the first pronouncements on auto-enrolment in 2005 through to the point when the DWP turned off the commission tap in 2014.
When I presented to 200 odd employers at the Pitch Final, one of the judges told me afterwards that she hated pensions and would never pay a penny to me or any pension advisor. I asked her what she did for her current employees and she said they paid for their own advice. She turned really nasty when I pointed out they wouldn’t for much longer.
There are going to be some very angry employers when the proverbial hits the fan. Next year will be a year of re-negotiation, of re-statement and of resentment. Those advisers who have always charged fees will not be affected, indeed they will pick up business when employers choose or have to move. The 1.2m employers who will be staging auto-enrolment between now and the end of 2017 will be faced with the novel concept of having to pay for pension advice or risk offering their staff a pension blind.
The implications of the abolition of commission on these employers has not been properly recognised. They have at least one advantage over larger employers who have chosen to fund pension advices from their staff’s policies – at least for them there is no cold-turkey. They were never hooked.