Is advice being unfairly subsidized by the tax-payer?

The cost of pensions tax-relief is likely to be a burning issue in the months ahead. The tax-payer is supposed to incentivise good behavior. Pre-funding retirement income leads to self-sufficiency and independence on younger generations in later life. That’s why the Government pays incentives to save, even to those who don’t pay tax (we’ll leave net pay out of this for the moment).

The Government has also accepted that a financial adviser, can charge the cost of advice to a pension, in so doing avoiding having to charge VAT , taking the payment out of a pot which may have had a 45% incentive on inputs and 0% taxation on growth.  This is no small matter as a comment by Stanley Kirk on a recent blog confirms

The important bit , for the purposes of this blog, is the final sentence. The high charges on SJP Pensions and those of their competitors is down to the pension fund paying for financial advice. Here are the other numbers

At a time when gross return expectations on a pension pot are 3-5% pa, to find that charges are between 1.7% and 3.8% suggests that SJP and similar organisations feel they are still treating their customer fairly when they are reducing the pensions yield at such a rate.  Here is my rely to Stanley, who I don’t take issue with.

Here is the big question. Are vertically integrated advisers justifying the high Reduction in Yield on people’s pensions by the value they are bringing to the pension, or is the RIY paying for the many benefits that SJP policyholders get from SJP (holistic financial advice, financial  education, mentoring , access to tax and legal services and networking).

I think it is unlikely that the cost of advice is made up for by better financial outcomes from the pension. But I think this can be tested as a separate measure, the value for money of advice.

I think it very likely that the cost of advice pays for the wider lifestyle benefits listed above.

But should the tax-payer be subsidizing the SJP customer experience through pension tax-relief?  A high proportion of funds under management at SJP (£106bn)  is in pensions which are paying 2.4% pa on average to SJP and advisers.  A high proportion of that 2.4% is paying advisers who appear to being supported primarily from pots that have been highly tax-advantaged. In practice both SJP and its partners are receiving a very substantial tax-subsidy through the vertical integration of the advice. This subsidy covers everything – right down to the financial foppery of the cruises and cufflinks.

The problem is not unique to SJP, indeed SJP – according to Grant Thornton are relatively “less-expensive” than their rivals – according to Grant Thornton

The social issues

At a time when social justice is to the fore, I question whether this tax-payer subsidy to SJP and its partners can be justified. I am not just thinking about the 1.7m savers who are being denied savings incentives due to the net pay anomaly

I am also thinking of the 1m pensioners who do not claim pension credit because they do not understand the system.

I am also thinking of the 600,000 people who get to 55 each year and who take no advice, principally because advice has become the preserve of the mass affluent.

The social issue with the payment of tax relief on pensions advice (and all the cross-subsidies) is that it gives to those who have and is paid for by everybody.

“Nudge” at St James Place

The system employed by SJP to minimise the pain of financial advice is very successful and has been in operation since 1970 when Hambro Life set up in Swindon. SJP, whose HQ is five miles out of Swindon, has refined every aspect of the system so that clients are nudge through it with the minimum of friction.

So friction-less is the experience that it wins accolades from its clients and outstanding customer service ratings.

But as Michelle Cracknell often reminds me, the quality of the experience can leave you penniless (Michelle was referring to the high level of service from scammers –  I am not).

SJP do produce great service and their recent AVA is a very high quality document, but a value assessment needs to consider opportunity cost.

The opportunity cost of the SJP production values is seen in the shortfall in funding in areas of public life that SJP need not concern themselves with.

SJP are in fact hugely philanthropic and have one of the highest levels of payroll charity giving in the country, but they can afford to be, blessed as they are with the excess wealth not just of their clients but from the Treasury’s tax rebates.

“Nudge” at SJP is not about creating better savings behaviors but about reducing the disruption of the sales process. So long as partners can rely on being paid from charges contingent on clients moving wealth to their management, then the complicity of the vertically integrated tax cross-subsidy will continue another 50 years.

SJP and firms like it will have to change.

I do not consider that SJP can continue to charge as it does (both in quantum and manner) indefinitely. So far it has reacted to criticisms by taking away the foppery of adviser incentives but they have nothing to address the fundamental governance issues  that flaws their revenue model.

So long as the governance within SJP is flawed, then attempts by Robert Gardner and others to embed ESG into the fund management process, will be compromised.

The eye-wateringly high charges quoted aren’t even the end of it. Because SJP is employing active management, the funds they use create high transaction costs on top of the stated charge.

Everything that leaves the pension fund, is subsidized by the tax-payer through pensions tax-relief and as we can see , this means something in the region of £2bn is diverted from private pensions to pay for some form of inter-mediation or other.

This is the real issue at SJP and it can’t be solved on the golf course.