THE BAN on commission on group personal pensions set out in the Retail Distribution Review will lead to a contraction in the numbers of corporate pension advisers and could see fewer consumers accessing generous workplace DC pensions, sayindustry experts.
The FSA consultation paper, CP09/31, Delivering the Retail Distribution Review: Professionalism, Corporate Pensions, proposes an end to the current commission-based system of adviser and employee benefit consultant remunerationin the GPP market. The regulator is planning to introduce ‘consultancy charging’, a process that requires advisers to agree charges with employers. Consultancy charging will apply regardless
of whether the end investor, the employee, receives advice personally. Consultancy charging replaces the concept of ‘arranger charging’, first mooted in CP09/18 last year.
Aviva head of pensions Paul Goodwin says: “The proposals will lead to a contraction in the numbers of advisers doing group pension business because they will not be allowed to take commission. We are being pushed towards a customer agreed remuneration approach, and if you look at the likes of Scottish Life who have operated such a model for some time now, the amount of business they have written on that basis is small.”
The FSA proposes that the adviser’s services could include advice to the employer on choosing a scheme provider, assistance in processing scheme actions, such as salary deductions or distributing key features and other documents to employees, as well as advice to employees – for example, about investment fund choices or contribution levels. Where an employee does not take up an offer of prearranged advice, no advice charge would be made.
The FSA says it was not swayed by arguments that there was no market failure in the group pensions sector, arguing that the “current commission-based market model is not sustainable. Those product providers offering initial commissions are subsidising these payments from their own funds, and, if scheme and member persistency levels continue to be poor, will not achieve economic returns on their GPP business.” The CP refers to group personal pensions, group stakeholders and group Sipps collectively as GPPs.
The FSA also argues that the fact that GPP new business is concentrated in a handful of providers that pay initial commission indicates that commission bias exists.
The FSA rejected suggestions that factoring of initial consultancy charges should be allowed, arguing that it would rather see a competitive
market based on product terms and quality of service, and because it could infringe competition law. However, commission arrangements on existing GPPs already in place need not be disturbed.
The FSA will publish its policy statement and final rules implementing consultancy charging in the contract-based corporate pensions market in the third quarter of 2010, about six months after the main RDR dviser charging proposals, which relate to individual advice, which are expected in the first quarter of 2010.