The title is intentionally ambiguous. Intermediaries – especially financial advisors – active in advising on pension saving and spending, are both confusing and confused.
In an article in the Daily Telegraph, former pensions minister Steve Webb was reported as telling Government
‘advisers’ secret deals cost savers thousands’
This appears a bit “foot in mouth” as Webb now works for an insurer famous for being the adviser’s friend and there has been plenty on twitter about whether the confusion was created by the advisers or about the advisers.
Webb said thousands of advisers who claim to be independent have in fact formed “cosy” commercial networks where pension firms reward them with large upfront fees. I agree with him and have written about this on this blog.
I have to deal with employers who are being asked to take near impossible decisions about workplace pensions which even an IFA would struggle to help on.
Here are the default choices that Aegon offer employers proposing to use its workplace pension. This was sent to me by an employer past her staging date and still to hear whether her existing Aegon GPP can be used to enroll eligible , non eligible and entitled staff.
Unsurprisingly, employers are finding difficulty making choices with only Aegon’s website to help them. You might reasonably expect a financial adviser to be on hand to help the client. In this case, the IFA- still taking commission – was not around to help.
In one of the most confusing threads I have ever moderated , IFAs have been discussing just how employers are supposed to choose the default investment strategy in workplace pensions such as the one above.
It gets even more confusing when the next question is whether, even if a choice is made, the pension provider will offer the workplace pension to staff not already in the group personal pension .
Again, picture yourself as an employer being asked to fill in this form without the help of an adviser.
The whole language of the questions is geared towards experts. In this case, the accountant cannot help, knowing little more than the client and the client is being approached by consultants demanding thousands of pounds to get her out of the mess she is fast approaching.
Why this confusion?
If anything is clear, it is that insurers are still leaning on IFAs to implement workplace pensions and help manage investment choice as part of the underwriting process. It would appear that many IFAs are no longer willing to do this work in anticipation of there receiving no further commission beyond April 2016 and because of the incentives to work in more lucrative areas of the market (see Steve Webb’s comments).
The confusion is coming about because the insurer’s, reasonably in my opinion, are expecting help from advisers they are still paying commission to. The IFAs who don’t help are really in dereliction of duty but neither employers nor insurers seem to have any legal power to enforce the IFAs co-operation.
What is to be done?
Insurers are going to have to make up their mind whether to buy the services of an adviser, (in which – to a degree – the adviser and insurer are tied) or to treat the advisers as independent. If they want independent advisers, they are going to have to stop dishing out “most favoured nation” deals where advisers are promised they have got the best possible terms from an insurer.
Steve Webb’s point is that the deals have a price attaching to them and typically that price is paid by other consumers in roundabout ways.
Steve Webb’s reported argument is that
a saver who buys a flexible pension from a “tied adviser” – meaning they have specially negotiated deals with certain pension companies – may pay far more than someone who buys the same pension from an adviser who doesn’t have such links.
Thus there are two forms of disadvantage: savers are at risk of over-paying, but also at risk of being recommended a pension that isn’t the best for them.
Deals that help no-one
Whether we are talking about saving (accumulation) or spending (decumulation) the issue is the same.
Insurers who try to buy the market end up distorting the market and prejudicing consumers. It is better to have independent advisers who are assessing value without the distortion of special deals.
There’s a difference between “vertical integration” and “rewarding efficiency”.
The recent practice of the mastertrusts who are offering reduced prices to employers who stage with the help of intermediaries is a different affair. This is effectively a recognition that an intermediary is likely to reduced the strain on the provider’s support mechanisms.
Providers who are not offering intermediary discounts are either offering limited support or subsidising direct customers (who cost more in hand holding).
I encourage this kind of open pricing, not least because it reflects operational economics and is not driven from a desire to buy business. But advisers are bound to question the sustainability of the business model of providers who don’t offer differential pricing, as we do with NEST and Legal & General – neither of whom dual price.
Efficiency and Self Sufficiency are the answers!
Our conclusion is that in the long-term, price should be aligned to support levels and should not be used as a lever to attract new business. Loss leaders on products designed to last 30 years + are irresponsible. Only if a provider can achieve 100% employer sufficiency can the NEST/L&G approach be sustained.
Those providers who do not buy market share but use their marketing budgets to create genuinely efficient take on and scheme management tools, will ultimately have the lowest support costs and will be able to sustain low pricing.
Organisations who continue to prime the distributor’s pumps with special deals will be the long-term losers. Where the IFA fits in a world of employer and employee self-sufficiency is a different question. IFAs are resourceful and agile. They will find a way to make money, they do not need hand holding from providers. Providers who have IFAs who they are paying who do not help their clients have every right to cry foul.
In that I am with Steve Webb!