Consultancy charging is in the dock. Advisers need to persuade the DWP why it should not be condemned says John Greenwood
Advisers face a winter planning blight on consultancy charging as the DWP digests whether it will abolish the charging structure altogether for auto-enrolment schemes. Advisers and providers urgently need to get their best ideas across to the DWP if they are to shape the regulatory framework in a way that means they will be able to continue to deliver services that benefit member outcomes while being paid out of scheme funds.
This question mark over advisers’ business operations could hardly have come at a worse moment for the auto-enrolment process, which is expected to crank into gear in the coming months as employer staging numbers start to snowball. With TPR recommending employers start dealing with auto-enrolment a year before their staging date, even that crucial Q2 2014 period when 30,000 employers come on stream could be affected by this regulatory spanner.
The DWP has confirmed that we will not get a decision on where it stands until February or March. A spokesman says: “We are still in the process of gathering evidence from the industry. We have not gone down the route of formal consultation because we knew that would have taken much longer. We will continue to gather evidence through January and a decision is expected on this some time in February or March.”
That leaves advisers facing up to three months of valuable time in a state of regulatory limbo. So how should an adviser deal with this most pressing of employer problems – auto-enrolment – when so much remains up in the air?
“We have certainty on the basis of the FSA regulations, which are that anything that reduces the contributions below auto-enrolment minimums are out, and that includes fund-based charges as the rules currently stand. But we do not have certainty about whether the DWP is going to take things further and ban consultancy charging outright for auto-enrolment schemes,” says Steve Cameron, head of regulation at Aegon. “It is clear we will not be getting any clarity on this issue for a number of months. Yet it would be disastrous if advisers were not able to advise on auto-enrolment at this time.”
Cameron believes that advisers can still proceed however. “While there are no guarantees, my recommendation would be that advisers proceed on the basis of what the FSA has made clear, which is that deductions above the auto-enrolment minimums are OK, but that you only do so for services that have a tangible benefit for scheme members, and that you also make sure to document clearly what you have done.”
In the interim the debate on consultancy charges remains live and corporate advisers need to seize the moment and make their voices heard says Thomsons Online Benefits chief executive Michael Whitfield.
Whitfield, who was one of the first intermediaries to meet with DWP officials at the end of last year, says officials are in listening mode and want to hear ideas from the industry.
He urges advisers and providers to act quickly to communicate their best ideas on how consultancy charging could be made to work without seriously depleting auto-enrolment pots.
Robert Reid, director of Syndaxi Financial Planning says advisers and providers need to come up with a workable solution that addresses the government’s concerns over reductions in eligible workers’ pots and not alienating low-earners.
Whitfield says: “The debate is live right now so it is up to advisers and providers to grab this opportunity to shape a structure that will offer something that will facilitate the delivery of pensions going forward.
“DWP officials want to know what sort of services advisers deliver and how low earners can be protected. My issue is that there is a direct correlation between member engagement, member contributions and member outcomes. If you just automatically enrol everyone into a scheme and they stay at the 8 per cent level then you are not going to get good member outcomes.”
Some in the industry have floated the idea of a lower charge cap but permitting consultancy charging within those parameters. Other ideas are an earnings threshold below which consultancy charging could not apply, but this is thought to be adding complexity to an already complex system.
The DWP is also believed to be receptive to the idea of not creating a structure that could ultimately reduce charges over the long term. For example, if an employer has been paying 5 per cent of earnings, and consultancy charging could have taken 1 per cent of contributions for one or two years, an outright ban on consultancy charging could force down to contributions to 4 per cent if the employer has to pay a fee. In this situation, the employee would have received 5 per cent a year from year three under consultancy charging, but would only get 4 per cent if it is banned.
Advisers at least have time to come up with clarity over the sort of charges they should be allowed to deduct consultancy charges for, and develop workable structures.