Employee benefits used to be simple, so simple that you didn’t need an adviser to tell you when you could retire, what happened if you got sick or the consequences of you dying while “in service”. That has changed. In the past three months two of our top pension consultancies have urged their clients to hook up with a reputable independent financial adviser to “maximise the employer value proposition”. Well at least that is how it is sold to Human Resource, the FD gets a different message, the IFA is there to de-risk the balance sheet and minimise pension strain.
To be fair, pension consultancies like Willis Towers Watson and Lane Clark Peacock are not recommending their own IFAs. They are suggesting partnerships where regulated advisers are on hand to deal with the day to day questions that Human Resources have to avoid. These typically start “I know you can’t give advice but…” and end with a disgruntled employee being given an introduction to unbiased.co.uk .
The advantage of having your very own “man from the Pru” is that you’re taking zero risk. The IFA is able to provide up to £500 of advice (including VAT) at your expense without it becoming a benefit in kind. What’s more, should your employee to pay for advice about his or her pension, a further £500 can be paid from the pension to meet its cost. So Financial Advice is becoming a tax and risk- efficient employee benefit.
The disadvantage of paying for a captive IFA, is that there is traditionally no budget for it. This article looks at the business case that accompanies the appointment of an in-house or captive IFA and questions whether doing so is quite the “risk-free” option it is sometimes made out to be.
Things are a lot easier if the firm has a defined benefit scheme. The Finance Director’s usual stern disposition can be warmed by the prospect that any residual liabilities in the (now closed) defined benefit schemes can be removed from the balance sheet considerably cheaper using a voluntary transfer than through a bulk buy-out policy, against which liabilities are typically priced (for accounting purposes).
Having won the heart of the FD, there is now considerable upside for the HR department. The flex program which cost a fortune to put in , but is hopelessly under-valued , can now be promoted with impunity by this third party. Ageing employees with retirement in sight can find a helping hand to lead them off into the sunset. Striving executives can have their lifetime and annual allowance issues put to bed and workplace pension savers can have the pension freedoms dangled before them as a thrift-inducing carrot.
If this all sounds too good to be true, you have probably the dim view of the IFA that has prevailed for two decades since the end of the pension mis-selling crisis. Since then, IFA numbers have fallen from over 60,000 to just over 20,000. The major driver in reduction in numbers has been the abolition of commission on pensions which was brought in through the retail distribution review in 2012 and extended in the next four years. Since 2016, IFAs have received no commission on sales of workplace pensions.
Along with this cut in revenues, IFAs are now subject to considerably tougher training and qualifications that at last put them on an equal footing with lawyers and accountants. Expect to pay an hourly rate for a good IFA of between £150 and £200 (+vat). Top IFAs are now switching to a fee-charging model so that advice can be truly independent.
Without a DB scheme to de-risk, the business case for a captive IFA looks a lot tougher to construct. Any cost is hard to justify if the advice given was previously assumed to be free.
For employers who still want IFAs to advise for free, an alternative model sees IFAs promoting their own “vertically integrated” savings products where the annual management charges include a proportion paid to the advisers, notionally for their part in the investment management. Fees are often waived if in-house savings products are purchased, a practice known as “conditional pricing”. In practice, conditional pricing looks like commission under another name.
Nonetheless, ingenious pricing structures enable HR departments which cannot afford hourly rates or fixed prices, to pass on these costs to members through higher investment costs. The IFA can properly offer choice of pricing structures, though how well disclosed the difference is to the employee, is open to question. As employees are now being asked to take all the other pension risks, employers adopting the “free advice” model, are running some long-tail risk, especially if the impact of “fee-drift” is likely to be recognised by staff.
Meanwhile the arcane arguments over whether employers need to provide advice or guidance continue. The FCA has an ongoing study on the question and is increasingly looking at workplace guidance as a solution to the problems it finds less wealthy people have paying for advice.
The accepted wisdom is that guidance is anything that isn’t the provision of a definitive course of action. Put another way, so long as an employer is not telling staff where to invest and how to organise their affairs, then they are providing information.
Ironically, most of the best-informed pension experts, do not want to give advice, partly because of the perceived stigma attaching to IFAS and partly because the added costs of regulation make it difficult for such an expert to charge cost-effectively,
We await a sustainable answer to the question “should my firm appoint a captive IFA”. The Competition and Markets Authority is investigating “vertical integration”, the FCA is probing “conditional pricing” structures and the boundaries between advice and guidance remain unclear. With such a fluid regulatory situation, employers may well decide to “wait and see” before jumping into bed with an IFA.