I feel like someone walking to a destination with a blindfold on, I am getting information from my phone but it is intermittent and there are many obstacles that I stumble over as I walk along. Thankfully, there are people watching my progress and warning me to watch my step!
- Yesterday I learned a lot about workplace pensions that I didn’t know. Much is tied up in my blog about what is officially the “TATA Personal Retirement Savings Plan (PRSP)”.
- I learned about the default investment strategy, its composition (55% shares – 45% bonds, equity), its objectives (to help people invest to retirement) and its charges (0.26%).
- I learned that advisers can use this low cost , diversified strategy to help clients achieve good retirement outcomes and be paid for doing so through “adviser charging”. This can even include the cost of transfer advice which is charged “conditional” on the transfer being executed into this Plan.
- I also leaned that the advisers who set up the plan do not offer individual advice but that Aviva allow the transfers to be managed under a separate agency agreement and be paid for at the request of the client from the PRSP pot.
As almost all those still working with Tata are using the PRSP, it would seem the “natural thing to do” to consolidate any transfer taken from BSPS into this plan. But this option does not seem to have been considered by all but a fraction of advisers or BSPS members.
I remain confused – why not? If Tata chose Aviva to run its workplace pension (into which they will pay as much as 10% of workers salaries, one would expect this choice to have been advertised as a good one. Large companies do due diligence, they do not commit large amounts of their and their staff’s wages to a plan that isn’t good – they conduct due diligence.
This due diligence should provide workers with a safe harbour – the first port of call in stormy times. Why has it not been visited by all BSPS deferred members in their “Time to Choose”? I searched the Time to Choose site for information about PRSP but couldn’t find anything. I searched the BSPS Scheme site – no help.
Finally I googled the full fund name and found a website set up to help members with the plan. It contains a webcast with all the details of the PRSP which you can watch here.
Ironically , Aviva told me yesterday that they couldn’t tell me how much PRSP cost, but this information , like everything else I needed to know, is in the public domain! If I go to the dedicated Tata Personal Retirement Plan website and navigate through a lot of linked pages, I can even find a page that tells me my options if I have another pension plan. You can see this page here.
Unbelievably, this website makes no reference to BSPS, whether money from BSPS can be transferred, what the terms of transfer are. It’s only next step is to a contact page
Is this helpful?
Steel workers are thrown back into the same loop – with a link to http://www.unbiased.co.uk which will take them to advisers. There is no responsibility taken by Aviva, or the plan adviser (whoever that is) or indeed Tata – for everything reverts back to unbiased.co.uk.
This PRSP, the primary retirement vehicle for Tata steelworkers going forward is so divorced from the Time to Choose process as if it were a Dutch or American plan, and yet it offers a default investment strategy in a product selected by the employer sponsoring BSPS, BSPS 2 and the employer or former employer of all 133,000 people in their Time to Choose.
I don’t think this is helpful. If I was a member wondering around with a blindfold on, I wouldn’t be feeling anyone wanted to help me.
More stumbling in the dark
As I continue to wonder around with my blindfold on, I come to more information I did not know. Last night I watched the BBC news at 10 to find out that people have been losing hundreds of thousands of pounds by transferring out of BSPS at the wrong time.
Apparantly advisers should have been telling their clients that the transfer values on BSPS were about to rocket up, though I haven’t been able to find out how they could have foreseen this, nor why they actually shot up.
That people accepted one price for their benefits only to find they could have got a couple of hundred thousand pounds for the same benefits a month or two later suggests a failure in the valuation process (as well as a question as to how the lower value could have possibly been worth taking). I don’t intend to go down that route today, as I expect I will get some help from somebody as to what really happened earlier this summer and why transfer values shot up (I said I get a lot of people stopping me stumble).
But the program brought up a word I had not heard mentioned in pension circles for a long time – the C word – Commission.
The regulatory expert Rory Percival picked up from the BBC news piece the use of the word in relation to what was going on at Celtic Wealth and Active Wealth Management.
Poor to see inaccurate @bbc5live reporting that financial advisers receive commissions for advice on pension transfers. Commissions were banned 5 years ago #BSPS
— Rory Percival (@rorypercival) December 5, 2017
Technically I am sure he is right, but Alan Chaplin had a point when he replied.
I had made the same point to the FCA’s Robert Finer at a Transparency Symposium last week.
A major contribution of SIPP platforms to the advisory market is the facilitation of layered contingent charges levied as a % of fees which work no differently than commission.
Put another way, the customer can be led around with blindfold, for all he’s going to see of what he’s getting – and paying.
The charge that dare not speak its name?
If a client signs up to pay an annual fee to an adviser for an indeterminate time, with the onus for cancellation being on the client and the fee being taken as a percentage of funds under advice, that fee is a commission.
Lawyers may argue on a pin, but the charge that dares not speak its name is “commission”.
What every business wants is to amortise the annual value of fee income several years ahead as this gives the shareholder a capital value to the business and a price on which to buy or sell it. Commission does this, it only stops when a client cancels the agreement. We know that clients don’t do that very often, so the practice of embedding advisory fees into products is highly desirable to anyone running an IFA business.
By comparison, the need for advisers to annually request that a fee be taken – the practice that Aviva demand in operating adviser charging – works the other way round. The adviser has to justify his or her fee every year, the fees cannot be amortised and the value of the business is measured against the capacity of the adviser to gain repeat business.
Am I stumbling here into an area where someone can help me? Am I hearing and reading the wrong things, or am I finding myself groping in the dark adjacent to something that might just be called “the truth”?
Is the reason that the TATA GPP is not promoted by Aviva , Tata, BSPS or institutional advisers because they are terrified they might be considered to be giving advice? Is the reason that the TATA GPP is not promoted by advisers because they are terrified of not getting paid? Where are members interests in this? Why is nobody talking about this?
Finally – what does the regulator make of transfer advice to TATA workers looking to transfer BSPS benefits that doesn’t refer to what TATA’s dedicated pension website refers to as “the Company Pension”?
All answers to henry.tapper@pensionplaypen.com or in comments below – thanks!
Without wishing to be pedantic, there is a difference between adviser charging and commission, and it directly affects the investment made, pension or otherwise. It was very disappointing to see the use of the word “commission” on the BBC Ten O’clock News last night; this perhaps demonstrates the muddle we have regarding paying for advice.
Up until the abolition of commission at the end of 2012, most investment products had a complex range of charging structures; these were mainly there to enable the provider and/or the adviser to extract commission from the investment, without it being very obvious to the investor. Whilst it is true to say that an IFA could “adjust” the product terms by “waiving” some of the commission “entitlement” – and many did to improve their clients terms – most product sales were commission-driven. Today, the “playing field” has been levelled to a great extent, as I’ll try and demonstrate.
Let’s say you had decided to take a CETV of £500,000 into a personal pension (ignoring as to whether this is the right course of action). The adviser has made a recommendation backed up with a transfer value analysis report. Let us further assume that an “insured” personal pension rather than a SIPP has been recommended.
We are back, magically, in the commission world, and for the sake of simplicity let us assume that we are using a commission “rate” of 5.6% of the contribution, which was around the market average up until the 2010s. So the adviser will be paid an eye-watering £28,000 up-front commission for the case. How was that done? Well, an average PPP would have had a 5% bid-offer spread (that’s £25,000) on the investment, then there would have been a policy fee of, say, £5 a month, plus an annual management fee of, to be generous, 0.875% (that’s £4,375). Most contracts would have had an enhanced allocation rate – let us assume that on a £500,000 CETV that the allocation rate was 104.5%.
We end up with £500,000 x 104.5% = £522,500, less 5% (£26,125), less 0.875% (£4,343.28) less £3 x 12 (£36). Roughly speaking, then, at the end of the process the amount invested comes to £469,495.72. Not so very attractive.
Let us imagine that our imaginary client now wishes to take his CETV into a PPP on today’s market. First, he/she has to agree a fee for the adviser and let us say that the fee is £6,000 up-front. I’ll ignore the thorny problem of “ad valorem” percentage fees (I hate them, for all sorts of reasons). £6,000 would represent about 30 hours work, TVAS fees, and profit. What would happen today?
Well, it is rarely the case that a client will just write out a cheque (it does happen, though), so the fee is very likely to come from the £500,000 CETV. That’s attractive, as the fee comes from a gross fund rather than after-tax income.
So, the £500,000 is transferred to a competitive PPP, and the adviser asks the provider to deduct the £6,000 from the investment. That means, of course, that £494,000 is invested into the agreed fund(s) in the PPP. There are no bid/offer spreads, policy fees, enhanced allocation rates or reduced allocations to funds anymore. A typical PPP today would operate an one “all-in” annual management charge; in this instance, let us assume, 0.60%.
At the end of year one we can see (ignoring investment returns) that £500,000, less £6,000 = £494,000, less 0.60% £2,964 = £491,036.
A better deal, but not as good as the Aviva GPPP at British Steel!
I do think, however, that the “adviser charging” facility on the TATA Aviva arrangement will not be available to all and sundry IFA’s – just the firm that set it up, but I would be pleased to be corrected on that point.
I can’t operate a blast furnace, but I do expect to explain the costs and risks of transferring to a PPP or SIPP in plain English!
When fees are taken from the product what is the difference than how commissions were applied? The difference now is fees are more expensive than commission ever was when a contingent charge is applied of 1%pa – This was supposed to be stopped when RDR was introduced but once again the Financial Services Industry gets its way and the customer suffers blindly once again.
Add into the mix that anyone who does a google on unbiased and goes beyond the paid for ads and their page, sees that for the last 18 months they have been in the news for hosting incorrect details – how is a member of the public to know which are genuiune and which aren’t? e.g. https://www.moneymarketing.co.uk/unbiased-urges-fca-to-act-on-which-false-qualifications-findings/
I really don’t understand the fear from Trustees/company/unions over giving some general advice to people e.g.
1. Almost everyone is better off in BSPS2 than PPF so unless you are in one of these groups (a,b,c …) you should start by assuming you are in the BSPS2 scheme now. You have to complete and return the forms by [date] to make sure this happens.
Having said that, why is the default position PPF? I suspect it is the law as the switch is technically from BSPS to BSPS2 and BSPS2 is worse so you cannot move without consent. If so, something for @Frankfield team to consider i.e. the law should reflect the reality that BSPS will cease to exist so the choice is PPF or BSPS2 and the default position should be the better of those two – the enhanced transfer code of conduct has reasonable guidance on how to test that.
2. You have the right to transfer out. Most reputable advisers and the regulator say staying in a DB scheme i.e. BSPS2/PPF is usually right for most people. So unless you are (a, b, c …) you should probably stay in BSPS2. You can change your mind and transfer out later if you want to. Once you do transfer out, you cannot reverse that decision so take your time.
2.1 If you do decide to transfer, bear in mind the company DC scheme. This is a good quality scheme from Aviva with low charges on the default investment fund. You will have to pay for advice to transfer which should be a one-off fee. The default fund may not be perfect for you and there is a wide range of other investments you can choose from. If you are unsure of how to choose an investment, then the default probably is right for now – Aviva, Tata and its investment advisers spent considerable time and money designing this to meet the retirement needs of the “average” member. You can change your investments at any time and you can also transfer again to another provider in the future.
2.2 An adviser recommending another scheme should be able to explain why it is best for you and specifically you can ask why it is better than this one. In particular you should be aware there is often an annual fee attached to managing your funds going forward – make sure you understand how much that is, what that is for and that it is a service you want.
Alan has hit the nail on the head here and recommends a very sensible course of action. I’d say that 90% of DB Scheme members are really best advised to stay put. The other 10% usually have “something special” going on, such as reduced life expectancy and even here one must be mindful of the potential for an IHT hit should death happen in the first couple of years.
We have had a great run in the markets for most DC investors and “what goes around comes around” and a “correction” might or might not happen soon. Then we will see how individual investors really feel about their “flexi-access drawdown plans”! I’m not expecting this to be much fun, especially for those poor souls involved in some of the extraordinary DFM arrangements we hear about.
Without wishing to be at all patronising, I’d guess that most British Steel workers might even be called “vulnerable clients” as few will be pension “experts”.
I’m beginning to feel very despondent about the enormous “reputational damage” irresponsible and greedy “advisers” will do to the rest of honest IFA’s!
This is really helpful for me thinking about my upcoming evidence to DWP select, I want to focus on the what can be done better not the what went wrong aspect of things- I could do worse than read this out! Thanks Alan
Henry, there is a lot in here. In general a GSIPP is designed for mainstream workplace business not wealth management, and although these are slowly coalescing, they are still basically birds of different feathers. It is difficult to serve 2 masters … wealth management and corporate.
Thanks for all these helpful comments , as John points out, I come from a workplace saving not a wealth management background (and most steelworkers save in the workplace). This really helpful info was posted on linked in and I’ve lost the source – please claim it if it was you – and thanks!”
“Henry, adviser charging may look the same as commission to some people, but there are a few fundamental differences: –
1. Commission cannot be switched off by the client. In some circumstances (but not all), a client could redirect trail commission to a new adviser. In nearly all circumstances, however, if the provider stopped paying commission this did not lead to a reduction in charges to the client – the provider just trousered the difference. This has happened a lot on pre-RDR contracts, advisers have shouted loud and clear about it being unfair to both advisers and clients, and we have been ignored.
2. The client had no idea which charges paid for the commission, or if they were reasonable and good value, or excessive and poor value.
3. Adviser charging can be switched off by the client at any time. It is explicit, so the client can see what the adviser is being paid. The client can also see the effect of switching off adviser charging, as the charge immediately drops away.
4. If a client switches adviser and notifies the provider, any ongoing adviser charge to the previous adviser is stopped and the charge removed from the plan, so benefiting the client.”
I have now tracked down my source and it is my good friend Kevin Neil . Thanks Kevin!
https://www.linkedin.com/in/kevinneilifa/?midToken=AQFOO8J_OUKYeA&trk=eml-email_nus_comment_single_01-nus_comment-16-null&trkEmail=eml-email_nus_comment_single_01-nus_comment-16-null-null-8avfv%7Ejauvumkj%7Erm-null-neptune%2Fprofile%7Evanity%2Eview&lipi=urn%3Ali%3Apage%3Aemail_email_nus_comment_single_01%3BhkwRIMPcTRWVOi0izxDD3A%3D%3D
I think Alan Chaplin makes some excellent suggestions there. It is a shame that where there is a “bulk decision” to be made the Trustees do not seem to be able to give this kind of overall summary of options. It just goes to show that regulation has the best intentions but often leads to unintended consequences. In the absence of such helpful summaries there is then a gap in advice. This is not a gap that can be filled without changes to the current regulations. There are not enough advisers with suitable qualifications and experience available to offer the level and amount of help needed to make the right decisions. And there are not adequate payment mechanisms in place for advisers to be paid to do this work. Where the advice is for members to either stay in BSPS or go to PPF there is currently no mechanism for advisers to be paid other than from the members pocket, and VAT would be chargeable. I have written separately with suggestions about this but for the moment unless the trustees pay advisers to give individual advice it is the member who pays the adviser directly when the advice is to stay with BSPS or go into PPF.
Separately from this point, the argument about commission versus contingent charging versus ad valorem fees is one that will rage on for years yet. It comes down to the integrity and expertise and ethics of advisers to give good advice. But it also requires such advisers to be paid in a way that the member transferring or not transferring can understand and where they can agree to the payment. I don’t have a moral objection to commission per se, instead I object to the concealment of charges and costs which are taken without the customers knowledge, understanding or consent. The worst examples of commission were in the 1970s, 1980s and 1990s when direct commission only sales forces such as Allied Dunbar were not paid unless they sold. They were often not properly trained to understand the consequences of their activities, but were well trained in how to paint pictures and inspire customers to buy plans. Some of the plans sold by proprietary sales forces had underlying charges where no premiums at all were invested in the first two years, and then had very high bid/offer spreads and proportionately high flat monthly charges for the rest of the plan term. People who sold these plans were maybe not guilty of anything but ignorance of their actions(being very generous here), but the upshot was that customers bought plans where returns were severely impaired by the often non-disclosed charges. The big issue was not so much the commission as the concealment and non-disclosure of all charges, i.e. product charges well as commission. Life offices have long been guilty of developing business models which serve their needs ahead of those of the customer and the sales person. And they are still doing it now. If all life companies allow the customers’ own IFA to collect AGREED fees from the pension then the GPP scheme could be properly considered by all IFAs as a suitable home for the transferred Defined Benefits CETV. Where I disagree with Alan is where he says the transfer decision should require a one off fee, but that is because I believe the advice about transferring is not just about the investment decision but also about the ongoing coaching and advice on behavioural finance. I think that RDR has solved some problems but have also created quite a few others.
All good comments and suggestions thus far. There are two points I think may clarify / enlarge on the problems:
1. As we discussed the other day at the Friends of Auto Enrolment lunch meeting, Trustees have a duty of care to members until such time the funds leave the scheme. Consequently the Trustees should be made (legislation isn’t needed, I think tPR should strengthen the CoP13) making them provide better information and consequential pros and cons, this is quite feasible without the need to cross the advice line. In addition, as Henry says, why has not all the information been given IN FULL to the membership of BSPS this time – including the GPP? This to me is a failure in their current duties.
2. From the IFA perspective, this may clarify the dilemma. I’ll not use the C word and refer correctly as Adviser Charging. The GPP was effected by an Adviser under the instructions of TATA or the Trustees and the scheme was registered with Aviva under that Adviser’s agency. Providers only register one servicing agent to the scheme who would receive adviser charges according to his/her agreement with TATA/Trustees.
IFA’s advising transfers into the GPP can request an explicit deduction (with the member’s agreement) from the transfer value and Aviva (MAY) pay that charge to the Adviser’s agency (if he has one with Aviva, most would but it is not guaranteed) as a one off fee for the transfer advice.
Where the difficulty lies is with ongoing servicing, on 2 fronts>
a) The default fund and any wider range of funds (this doesn’t have to be the whole of Aviva’s funds as some may not be available within the charging structure of the GPP – i.e. they may have an AMC high than the standard GPP terms) but again Aviva may be able to cope with that. Schemes may have blended funds with multiple constituent funds and finding all the CEDOL numbers could involve extra work and the original Advisers could change the blended fund mix at any time – Master Trusts are using this route; again I am not aware this is the case with BSPS but it is a possible wider issue with other schemes and transfers thereto.
b) Secondly, is the important thing from the Adviser point, in that it may be difficult for him/her to receive an advice fee from the fund for say an annual review for a single member and subsequent recommendation to the client as Aviva may only pay ongoing fees to the registered agent. Thus we are back to the unpopular direct client fee rather than the more cost effective deduction from pot. The practicality of ad hoc fees also presents a problem so this would encourage a fixed % being registered with Aviva which may not reflect the actual work undertaken. Technically it is possible for multiple Advisers to be registered but Life companies don’t like it or their systems can’t cope as until RDR the single agency was a valuable protection for the original scheme Adviser to secure his ongoing income for advice to the scheme owners, not the members. Even that original Adviser to the scheme would have to arrange bespoke individual fee agreements with members if he/she acted for them specifically. The GPP site also provides access to the members to manager their funds and switch – I doubt that a third party Adviser would be able to register for access and I certainly wouldn’t suggest the member gives an Adviser cart blanche access to the member portal. I’m sure Aviva’s objective is to encourage members to self-serve to keep costs down and wouldn’t encourage third party manual switch requests.
Some of these hurdles may be overcome depending on the relationship the third party Adviser has with Aviva and their willingness to entertain the additional administration involved of having multiple registered Advisers within a scheme’s membership records