Sins of commission?

The ABI may be happy with the outcome of the RDR on corporate commissions. John Greenwood finds not everyone else is

We all knew that the Retail Distribution Review was going to cause a big shakeup in the corporate pensions market. Actually seeing the outlawing of commission in black and white, on the other hand, has brought home to many just how significant a change the industry is in for.

Publication of CP09/31 has triggered recrimination and fresh thought on what the new market might look like in equal measure. Some advisers are critical of the way pension providers have been complicit in smashing to pieces a model that has fed and clothed them for several decades. And although the ABI is applauding the outcome in the RDR, some of its provider members are privately hailing the proposals as a stitch-up.

For advisers and providers currently operating in the commission space the future looks decidedly uncertain, and many are predicting a contraction in adviser numbers with time. For employers who have been happy to pay commission until now but who will never sign a cheque for
a fee, 2013 is likely to mark the end of the road for quality pensions, for new business at least. In the three years before then, however, a rush of new business is predicted. Because existing schemes will remain untouched by the rules, advisers may flock to set up schemes on a commission basis and milk them for years to come thereafter.

John Lawson, head of pensions policy at Standard Life says: “With new products around there are pretty good reasons to change a scheme – more choice, active member discounts and the rest. For the adviser with a portfolio of commission-based schemes there will still be revenue to
be had. There will still be commission on the 15 per cent of new joiners, plus incremental pay rises. After the RDR advisers will not want to rebroke what we used to call a dripping roast.”

The RDR ban on factoring, that would have allowed a proportion of early years’ contributions to be deducted from the policy, over a period fixed by the industry, has been rejected by the FSA on the basis that it could face a challenge on the grounds of being anti-competitive. Some experts argue that this is nonsense, and that it is no more anti-competitive than requiring all providers to operate within a 1 or 1.5 per cent charge.

Alasdair Buchanan, head of group communications at Scottish Life says: “While there may have been some concerns that our approach to factoring could have been viewed as anti-competitive, we believe that it could have been approved by the Competition Commission as being in customers’ interests.”

Stephen Cameron, head of business regulation at Aegon says allowing providers to take, say, 5 per cent of contributions out of the first five years’ contributions would allow advisers to continue to deal with employers who do not want to pay a fee, and would be cheaper over the life
of the policy than a higher amc for life. To make matters worse for those trying to distribute pensions to those who will not pay fees, when personal accounts are up and running, employers would then face criticism for offering schemes that were more expensive in the early years than the state-sponsored offering. With the DWP saying that exempt schemes must have a default that has charges in the stakeholder ballpark, non-fee business has nowhere left to run, even if they are cheaper in the long run.

Cameron says: “Price caps are not consistent with consultancy charges.” Experts have also raised questionsover the accuracy of the consultation paper’s analysis of the market. It describes a model for GPPs, a term which the consultation paper uses tocover group stakeholders and group Sipps, as being distributed 91 per cent through IFAs. Standard Life says around 45 per cent of its business comes through EBCs, taking around 10 per cent of the entire market, making this figure look questionable at best.

Paul Goodwin, head of pensions at Aviva says: “The FSA’s data requires some justification. 91 per cent looks a rather toppy figure to us. We don’t think that takes into account the amount of business being written by EBCs.”

Nor are EBCs operating 100 per cent on a fee basis. One life insurer describes how around half the business it writes with one of its top EBCs is done on a commission basis.

There remains a long way to go before the Retail Distribution Review takes effect, and some will make hay while the sun shines. The demise of the IFA sector has been predicted many times before. What is more certain is that this latest consultation paper will kick off in earnest the review of business models that advisers have been talking about for several years now.