Eighteen months down the line from the onset of the Retail Distribution Review it is clear that the FSA still does not know how the group pensions market fits into the equation.
The regulator said last month that it will carry out a further round of consultations before publishing its directives next June.
Although the overarching goals of the RDR – to ensure greater transparency of charges and higher levels of professionalism – are widely lauded, there remain real concerns that workplace pensions could be seriously wounded in the process.
One of the major stumbling blocks, the FSA admits, is how to reconcile the fact that under group personal pensions the employee is technically the client, but it is the employer that negotiates the costs with the adviser, and typically pays for it. (See box)
“The FSA can’t really make up their minds on how to introduce the RDR to the group market because it can’t work out who the customer is where individual business is being written as group business,” says John Lawson, head of pensions policy at Standard Life.
Indeed, because of the somewhat contradictory nature of the GPP market, the FSA has favoured a lighter-touch approach, viewing it as a business-to-business transaction that did not warrant building in the same levels of protection that it has in the individual market.
Now, however, it appears that the regulator feels the need to intervene because the idea of advice to the employer being unregulated is incongruous in such a wholesale overhauling of the financial services market.
“There needs to be a distinction between the advice given to an employer and the advice given to an employee,” says Mike Fosberry, national head of financial services at Smith & Williamson. “But I find it very difficult to see how advisers who provide individual member counselling can avoid coming under the RDR.”
Going down this route would open up the age-old debate about what constitutes advice, he says, and risks resulting in grey areas emerging around such issues as whether providing members with details of the pension scheme or other forms of generic information are considered advice.
At the same time, any splitting of the requirements of intermediaries advising employers and those servicing employees would create a two-tier system, says Jarrod Parker, employee benefits director at Alexander Forbes.
“The requirements are likely to depend on what advice you are giving. We already have different tiers of advisers with some consultants providing advice across the whole employee benefits spectrum and others purely advising on GPPs where the employer has already chosen a provider,” he says. “You have to ask whether the latter really need to be as heavily regulated and if all advice does come under the RDR it could make life difficult for smaller corporate adviser firms.”
Also mooted by the FSA is the idea that the employers themselves may in some shape or form come under the auspices of the RDR. While some may welcome the greater formalisation of the employer’s role in the communication of benefits to employees, even the regulator acknowledges that this could deter some firms from offering pensions at all.
If the questions of who the client is and how their advice should be regulated aren’t vexing enough there is also the thorny issue of remuneration.
The debate on the merits of Customer Agreed Remuneration, or Adviser Charging as it has been rebranded, versus commission is a well-trodden path.
If there was any doubt before, the FSA’s stance now appears unequivocally anti-commission. In its latest update it says: “By the end of 2012, any payment for advisory services made through the customer’s product or investment must be funded directly by a matching deduction from that product or investment made at the same time as that payment.”
However, the regulator is guaranteed to face fierce lobbying from both those for and against in the run-up to June.
Michael Whitfield, managing director of Thomsons Online Benefits, says axing commission flies in the face of the FSA’s key aims, namely ensuring consumers have both choice and access to savings products.
“If one of the cornerstones of the RDR is Adviser Charging, the FSA needs to acknowledge that some employers will not pay for advice or accept monies being taken from their employee’s units to fund it,” he says.
“Treating customers fairly is about offering choice and the RDR will remove one of the biggest choices employers with low margins have to provide a decent pension scheme to their employees.”
Parker agrees, pointing out that most small and medium-sized enterprises, by far the largest market in number for GPPs, often operate on constrained budgets.
“If an SME has a 5 per cent budget for its pension scheme, most would rather pay in all of that as their employer contribution rather than invest 4 per cent and hold back the other 1 per cent for fees,” he says.
Both Thomsons and Alexander Forbes offer both commission and fee-based options to their clients but it is clear that large swathes of the corporate market will back their assertion that both remuneration models have a role to play.
Whitfield argues that providers are much more divided on the issue with those that can afford to pay it happy to continue while those on nil commission models want it scrapped.
Indeed, Steven Cameron, head of business regulation at Aegon Scottish Equitable believes that one of the FSA’s main arguments against commission, that it drives provider bias, is no longer valid.
“We have highlighted to the regulator that most life companies now offer bespoke pricing tailored around the nature of the scheme and there is now much less potential for commission bias,” he says.
The problems of churning and the potential for upfront commission to destroy value at life insurers remain though, says Lawson.
“Providers don’t want commission, they know they cannot make any money out of it, but they cannot afford to pull out because they will lose market share,” he says.
Assuming the FSA sticks by its guns on commission the question of how Adviser Charging can realistically be applied to the GPP market still needs answering.
Cameron says it is clear that Adviser Charging cannot be applied to the group market in the same form that is being proposed for individual sales.
“It is just not feasible for advisers to individually agree their remuneration with each scheme member and potentially end up with hundreds of different individuals paying different charges,” he says.
Few would argue, and he urges the FSA to use this opportunity to completely overhaul the current member disclosure regime to make the value of the benefits clearer.
Although mindful of the importance of not being seen to hide costs, Cameron also has concerns that Adviser Charging could end up confusing people.
“You have to ask whether it is helpful to tell members that the adviser is receiving ‘X’ amount when they have not received any advice,” he says.
Clearly, there is a balance to be struck between the rewards of full disclosure and the risk of discouraging employees from joining a scheme.
At a time when the economy is heading into a major recession it is imperative that the FSA treads carefully around the group pensions market, Whitfield says.
Indeed, much of his time with clients is being spent helping them manage their way through the downturn.
This has served to cement his belief that another key tenet of the RDR, the drive for advisers to become better qualified, must not be introduced as a broad-brush measure.
Whitfield is supportive of the push for greater professionalism but says the FSA needs to recognise that corporate advisers perform a very different role to that of the average IFA.
“I still believe that if we are advising the finance and human resources directors then our customers are the corporate entity,” he says. “We do not talk about pensions initially but the challenges they face, about their payroll, whether they are making redundancies and issues around mergers, for example. There are no qualifications for this- all of the exams are product specific.”
The FSA does recognise that there are many specialists but stresses that they should strive for additional qualifications. The lack of relevant exams means that while most corporate advisers ensure that their consultants are qualified to a reasonable standard, many are very reliant on in-house training schemes.
Lawson says that in effect the lack of minimum qualification requirements for corporate advisers has not been an issue as those without the knowledge or experience of advising on areas around the pension scheme, such as on annuities, would be quickly found out during the pitching process.
But the thousands of hard-working legitimate corporate advisers face a rather longer wait to find out whether they are deemed fit for purpose in their current guise by the FSA.
RDR – Feedback statement 06/6 – What the FSA actually said
The FSA may only have devoted two paragraphs of the 220 page RDR interim report specifically to the corporate market but few are in any doubt that it is firmly on the regulator’s radar.
Much to the encouragement of the industry, it recognises that group pensions “may necessitate a different approach” as “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 leads it to say that one approach could be to only introduce Adviser Charging where employees receive advice. However, this raises conflicting concerns it says underlining the fact that there are no easy answers.
“On the one hand, there is a risk that we could inadvertently incentivise firms to stop offering advice to employees at all if we did apply the new requirements to GPPs,” the paper said. “On the other hand there is a risk that firms could be incentivised to set up GPPs for customers that would previously have been advised to take out individual policies, if we exempt GPPs from any new rules.”
“In the coming months, we will explore the scope for applying Adviser Charging in the GPP market, keeping in mind that doing so could bring new problems as well as benefits.”
What it does not say, which is surely another threat, is that introducing Adviser Charging also risks driving many companies that cannot or will not pay fees, or that do not wish to pass on costs to their employees, into the arms of Personal Accounts in 2012.
What does the RDR mean for corporate intermediaries
The lack of directly relevant qualifications for corporate advisers has led to most firms placing greater emphasis on their in-house training programs.
Mike Fosberry, national head of financial services at Smith & Williamson, says that although the firm insists that its consultants meet the standards set by the professional bodies and their ongoing CPD requirements, a large part of this is about instilling confidence in its team.
“Being well-qualified projects professionalism but the issue for pure corporate advisers is whether there is a really relevant qualification,” he says. “We have our own training and competence scheme and believe it is this that drives the high standards of our advisers.”
Similarly, Thomsons Online Benefits runs the ‘Thomson Academy’, an intensive training program for its recruits.
Managing director Michael Whitfield says: “This is a proper apprenticeship and we put people through it to see if they are suitable.
“Qualifications alone are not enough for me.”
Thomsons is looking to expand its academy next year and up the number of graduate recruits it takes on board but Whitfield insists it will only keep on those that make the grade.