A delicate balance

The FSA would perhaps consider the RDR to be incomplete without including an investigation into the key principles in the retail group pensions market.

When I refer to the retail market I am referring to contract-based group personal pension and stakeholder schemes, where the contract exists between the provider and the policyholder. Group occupational schemes can also be regarded as retail, but as the contractual relationship is with the trustees on behalf of the sponsoring employer this is an area of less concern, although I will offer my view on why this might not be the case later.

The RDR feedback statement 08/6 makes two specific references to the corporate market. Firstly, the FSA recognises that while advice on GPP schemes is “frequently provided to an employer, it is quite common for employees to choose whether or not to join their firm’s GPP without getting advice.” This is fair but ignores the fact that many different business models operate in the group market, from cost-effective direct offer approaches to full advice models offering face-to-face advice at increased cost for individual members. A ‘one size fits all’ approach will, therefore, produce disparate results. I think the FSA are well aware of this.

Secondly, some respondents to the RDR suggested that an increased role for employers may be desirable because advice given to employers is not generally subject to FSA regulation. The FSA says this poses the dilemma that an increased role for employers could lead GPPs to be set up instead of individual policies to circumvent adviser charging requirements, or alternately, that requiring ‘adviser charging’ to apply to GPPs could stop firms offering advice to employees where they already do so.

The FSA recognises the problems here and, over the next few months, will explore the scope for applying ‘adviser charging’ to the GPP market.

The RDR is intended to increase professionalism, remove provider bias from the advice process, improve disclosure and increase transparency. The same applies in the group market, but the regulator faces the following challenges: GPPs are set up by employers and the bulk of negotiation over price/cost and services is conducted with the employer, not individual members; the cost advantages inherent in dealing with large numbers of members through streamlined processes do not lend themselves to individual negotiation of cost or service with employees, and employees have little capacity to influence the cost of the scheme or the services provided to them on an individual basis.

Furthermore, employers have little desire to take on additional responsibility for communication or advice where time/cost are issues, and where advice is provided it may be on a focused basis specific only to the GPP participation rather than holistic.

Axa agrees that employees ought to have a clear expectation of the services that are being provided to them on an ongoing basis. The cost of advice (as distinct from the cost of manufacture) ought to be understood by customers, but we are not convinced that precise matching will be easily achieved in a market where most of the advisory cost is incurred in initial implementation, and premiums to the scheme have yet to accrue.

And while considering these points we shouldn’t forget that occupational schemes, while having their own disclosure and member information requirements, are usually implemented as a result of negotiations exclusively with the employer.

While the contractual relationship with the trustees means that there is (usually) no advisory relationship with the members, it still doesn’t preclude the fact that there are costs incurred in setting up, running and maintaining the scheme as distinct from the manufacture of the wrapper itself. So the members face the same issues in terms of their personal ability to influence outcomes from the scheme as shown above with a GPP, yet these schemes will not face the same challenge.

This sidestep of the individual regulated advice relationship is undoubtedly one of the main reasons that Personal Accounts will be established as a trust-based occupational scheme. It was quickly viewed that a low cost route had to avoid the potential for any expense involved in the advice arena.

Equally, any increase in the cost of the current process for GPPs will severely test the capacity of employers to absorb that cost, or of advisers’ ability to pass it on, probably to the detriment of existing schemes and their members if any changes are not thought through carefully.