The Consultancy Charging Working Group has set out guidelines and best practice directions for post-RDR renumeration of workplace pensions, but has not made any detailed recommendations on how much advisers should charge for advice.
The group, set up by the FSA and overseen by the Society of Pension Consultants, has identified four key principles for consultancy charges – simplicity, transparency, value and flexibility/adaptability.
It says initial or one-off charges can be taken immediately, in the shortest possible time, or over a specified period, suggesting 12 to 60 months as an acceptable range.
The paper says consultancy charges can be fixed or tiered, whether through a single monetary sum, a percentage of employer and/or employee contributions or of funds under management. The group says its conclusions around consultancy charging should have equal application to defined contribution occupational pension schemes.
It says cross-subisidies between members are acceptable provided they are identified and either agreed with the employer or mitigated. Examples of acceptable cross-subsidies are where advice and/or services to the employer are recovered in part, or in whole, from the scheme members, where scheme set up costs are borne by initial joiners only, where scheme members with larger funds/contributions pay more (in simple monetary terms) than those with lower funds/contributions), and between active and deferred members.
The paper sets out examples of good and bad practice and sample consultancy charging contracts.
Sir James Hodge, chairman of the Consultancy Charging Working Group says: “As the original FSA consultation showed, the issues involved in consultancy charging are complex, and discussion within the Working Group was lively. I am grateful, however, for the positive and constructive spirit in which all members participated in the Working Group.”
Consultancy Charging Working Group Guidelines
- The consultancy charging arrangement should take account of the needs of the employer
- It should also take account of the needs, demographics and characteristics of the employer’s workforce so that it’s fair, as far as possible, to all members
- The arrangement should detail clearly the services being provided, to whom, the cost of these services, who is paying for them and how they are being paid for
- There should be a clear distinction between services provided under the consultancy charging arrangement from those provided under any adviser charging arrangement
- Where the consultancy charge includes a prearranged individual advice service, the cost of the service should be clearly shown. The member should be told where they can opt out of an individual advice service
- Cross-subsidy between members may be appropriate. For example, a consultancy charge proportionate to contributions or member funds may be preferable to a flat charge which penalises lower earners. This should, however, be weighed against the need for simplicity and consistency of approach across the membership as a whole
- If consultancy or adviser charges will have a significant adverse impact on members’ funds, consideration should be given to whether member advice may be delivered more cost effectively. For example, by providing guidance via employee seminars
- The charge structure should be simple and transparent so that employers and members understand how much the advice and services cost, and the benefits they receive from it
- The charge structure should be stable, as far as possible, so that it does not have to be changed often. Costs incurred by the scheme as a result of legislative changes may be an example where an increase in charges cannot be avoided
- The charge structure should be adaptable to a member’s changing needs. For example, on a member leaving the employer’s service
- Clear communications and disclosure of the charges to members n An education programme explaining to employees the benefits of the scheme and saving for retirement
- For a member leaving the employer’s service, any consultancy charges in respect of ongoing (as opposed to initial set up) services should be replaced if necessary by an adviser charging arrangement where individuals wish to continue to receive ongoing services
- Charging an employer or member for a service not provided. For example, if a member opts out of an individual advice service or leaves employment
- Overcharging an employer or member for an agreed service – Services and costs not clearly defined under the consultancy charging agreement
- Complex charging structures that employers and members don’t understand
- Charges which disproportionately impact on different categories of members. For example, high initial charges may disproportionately impact on members paying low contributions
- Applying unexpected additional charges(which could reasonably have been anticipated in advance) to an existing member. For example, the costs and timings of periodic reviews should be able to be anticipated whereas costs arising from future legislative changes will be unknown
- Continuing to apply the same level of ongoing consultancy charging to deferred members (unless the same level of services is maintained)
- Failure to review an agreement after changes in circumstances