A work in progress

More than two and a half years into the Retail Distribution Review, the FSA is still struggling to get to grips with how it should be applied to the group pensions market.

Although the subject does actually merit a full chapter in its latest consultation paper, which is a step up from the two paragraphs it received in the interim report, the industry is facing yet another round of consultation before it can start planning for the new regime.

Towry Law chief executive Andrew Fisher believes that much of the delay is due to the industry having to be “dragged kicking and screaming” away from the old commission-based model, but it is clear that the fact that with group personal pensions the employee is ultimately the client, but the employer negotiates the costs and typically pays them, remains a major stumbling block.

As such, there remain questions over how exactly the regulator’s proposed ‘adviser charging’ regime will be applied to the GPP market, particularly when so few members actually receive any form of personal advice.

“I have a lot of sympathy with this concern,” says Paul Gough, head of retail financial services at BDO Stoy Hayward. “It would be fairer to scheme members if the remuneration policy was more transparent. This is likely to mean employers agreeing a fair level of fees with advisers. These fees could still probably be charged to the scheme, even on an ongoing basis, but disclosure changes could make it a lot clearer as to what the total remuneration was, and the benefit gained from the service.”

This means that on the face of it little would change, and commission will continue to be paid in much the same way, albeit with greater emphasis on the need to justify the cost, argues John Lawson, head of pensions policy at Standard Life. He dismisses any notion that members would be expected to negotiate the adviser charge individually, as this would be unworkable and with scale on its side the employer is much better positioned to do this anyway.

Where the greater transparency is likely to have an impact is around the level of remuneration advisers can expect to receive.

“You will still effectively be able to pay commission but I don’t know how close this will be to the 20 per cent upfront commission some providers are paying now,” Lawson says. “There will probably be some insurers active at this end of the market that find ways around this disclosure by coming up with more creative commission arrangements, however.” (see box left)

Overall, Gough believes that some corporate advisers will see their remuneration levels fall, but the unintended consequence from the FSA’s perspective is the fact that the number of members that actually receive advice is likely to fall also.

Jonathan Reynolds, a director at Tenon, believes this is the greater issue as most advisers have already been forced to adapt to survive in a lower commission environment, with the likes of Standard Life and Friends Provident having long since pulled out of the indemnity commission market.

“I suspect that the amount of advice available will diminish rapidly,” says Reynolds.

Clearly not all employers will be willing to pay for their staff to get advice, and although it is not something Tenon would consider, more adviser firms are likely to purely focus on advising the employer and just carrying out worksite presentations and do away with one-on-one advice altogether, he adds.

The FSA’s suggestion that, for GPPs, the adviser charge could be replaced by an ‘arranger charge’, adds weight to this theory.

The arranger charge would make clear what the employer paid to set up the scheme and reflect the fact that the members are not receiving advice. Reynolds says that this would require good communications to ensure that employees understand it, but it would remove the potential for confusion if a member is being asked to pay an adviser charge when they are not receiving any advice.

Although it appears clear that one of these options will eventually form part of the new rules what is far less clear is how they will be applied to existing schemes.

“The real problem is where you get schemes that have historically always been commission-based,” says Reynolds. “If you mention fees it does not tend to go down well, particularly in the middle of an economic downturn.”

The FSA itself recognises that this is likely to push a number of employers down the personal accounts route come 2012, although it appears more concerned that GPPs will be mis-sold ahead of the introduction of the Government-backed scheme. (See p23 box)

The regulator also flags the risk that it might “drive the market towards trust-based schemes, which are generally outside our regulatory scope.”

Lawson says that for many employers, particularly medium- to large-sized firms, this will undoubtedly have its attractions and actually entail little effort on their behalf, as many will already have trustee boards in place overseeing their closed defined benefit schemes.

“The FSA talks about occupational schemes not being covered, but it is high time that they came under the same regulations. Why should a scheme governed by trustees be subject to a different regime, when in both cases the employer and not the employee is negotiating the charges,” he says.

Although shifting to a trust-based arrangement will have great benefits for the employer, the risk for consumer detriment is immense, Lawson adds.

“It will create arbitrage opportunities for the employer because under occupational pension scheme rules you can return contributions if the member leaves within two years, which you cannot do with a GPP. “If a company has high staff turnover, it can encourage people to take refunds of their contributions and they won’t build up any pension benefits.”

Fisher believes that this is another loophole that will be closed by the FSA, and several firms have said it is an issue that they will raise in their responses to the latest consultation paper.

“It is an anomaly and I think that this will be changed as a stepping stone to a broader re-write of the regulations,” he says.

By a similar token, many expect the different regulatory regimes effectively now covering corporate advisers and employee benefit consultants to be harmonised to allow for greater clarification.

Clearly, even at this late stage the RDR remains a work in progress and advisers wanting to have further input into the development of the new regime will have to act quickly, because the regulator is asking for responses to be in by the end of July, giving the industry just a month to digest what remain a number of challenging issues. The only hope is that it will listen closely to what those at the coal face have to say.

Commission loopholes

The Retail Distribution Review (RDR) may on the face of it appear to be ideologically opposed to commission but experts are highlighting a number of potential ways round the new regime.

Although some of these may be seen as legitimate means of ensuring that pensions remain affordable for employers and that employees continue to receive some form of advice, others clearly go against the spirit of the RDR.

Clive Grimley, a partner at Barnett Waddingham, says that active member discounts could become more commonplace as a way of effectively cross-subsidising costs.

He says: “Insurers say that it is fair, as their costs increase when they have to chase former employees, but it is a potential Treating Customers Fairly issue, as I think the FSA’s mindset is that members are being faced with charges that they have not been party to the agreement of.”

Grimley adds that schemes may also be increasingly costed on a nil commission basis, with additional basis points then deducted from the employer’s contribution to remunerate the adviser, particularly in year one where the adviser costs are highest.

Much more dubious is the notion of advisers setting up group Sipps for their own firms and then selling individual policies to clients out of this.

John Lawson, head of pensions policy at Standard Life, says: “Whenever an adviser sells an individual Sipp they could just make them a member of the group scheme and get round all the RDR disclosure requirements.”

What steps the FSA will take to close off these potential loopholes remains to be seen, but there is clearly scope for ‘creative thinking’ under the new regime as the proposals currently stand.

FSA concerns

The FSA has made clear that group personal pensions sales in the run-up to the introduction of personal accounts are likely to come under close scrutiny.

In its latest RDR consultation paper, the regulator says although it accepts that there will be circumstances where recommendations to employers to establish GPPs as qualifying alternatives to personal accounts will be justified, such as when the employer contribution is higher than the maximum proposed for the government-backed scheme, equally there will be instances where the benefits are more questionable.

As an example, it highlights when a more expensive GPP is recommended over personal accounts on the grounds that it offers greater investment choice, which the regulator says is unlikely to be used by most people.

The FSA says: “We want to be confident that our rules protect consumers in such situations and reflect the eventual charging structure of personal accounts.”

Several industry commentators have already flagged the possibility for advisers to rake in indemnity commission while they can in the run-up to the new regime as a kind of last hurrah. In some instances, such as where schemes have grown significantly since they were set up or last rebroked, this could actually benefit members if the adviser is able to negotiate lower annual management charges.

However, Paul Gough, head of retail financial services at BDO Stoy Hayward, says the more the issue is raised, the more likely employers are to be aware of this wheeze.

“One area of concern is whether or not advisers may wrongly recommend GPPs over personal accounts. The whole pensions arena is changing and we will need to see how things pan out. While there are undoubtedly challenges to be met, advance publicity of the issues should make the risk of mis-selling less likely,” he says.

The regulation conundrum

As part of its radical overhauling of financial services, the FSA appears to be keen to strip away some of the idiosyncrasies of the group pension market, particularly around the regulation of its practitioners.

Although conscious that many employee benefits consultants only provide advice to the employer and not the employee, it appears to want all corporate advisers regulated under one roof. This marks a change to its previous stance of being happy to impose lighter touch regulation on corporate advisers on the basis that they are providing a business to business service and as such, the extra level of consumer protection was not required.

John Lawson, head of pensions policy at Standard Life, says: “There are a range of employee benefits consultancies that are not regulated under the Financial Services and Markets Act, while advisers are. There needs to be a level playing field.”

A number of leading players are already moving in this direction. Barnett Waddingham, for one, has switched to being regulated under FSMA.

Partner Clive Grimley says: “We were regulated indirectly through the Institute of Actuaries but have now had the whole firm regulated as we do have a fair number of practitioners who are authorised to talk to members, and we felt that it was more appropriate given the scope of our offering.”