The abolition of consultancy charging has left both short- and long-term challenges for pension advisers. John Lappin picks his way through the rubble
With the stroke of a minister’s pen, consultancy charging has been banned, probably making it the most short-lived, payment method for advice in history. For good measure, a consultation paper will also be published this autumn examining the grounds for price capping auto-enrolment default funds. This DWP paper should come in the wake of the Office of Fair Trading’s report into whether the defined contribution workplace pensions market is working for consumers.
While many commentators say modern workplace pensions should come through the OFT investigation with a fairly clean bill of health, the consultancy charging ban has been perceived as a thornier problem for policymakers.
The DWP says it had seen no evidence that savers either sought or benefited from any advice delivered through consultancy charging. Added to this, pension minister Steve Webb is on record as telling one media source: “All the compromise solutions put forward were complex and would have given mixed messages to the public. With front-loaded consultancy charges there was also a concern that people who changed jobs would keep getting hit in their early years of membership.”
The reaction from the industry is divided between those who broadly agree with the move through to those who think some form of CC should have been preserved to help smaller employers. Others are glad to move on.
Standard Life head of workplace strategy Jamie Jenkins says: “We are pleased that the debate is over. We were concerned it was going to continue for weeks or months. It is good we are not left with a complex solution that would have involved complicated disclosure. Many large employers pay fees anyway and have the resources. Medium to small employers may not have set up a pension scheme before. They may seek the services of an adviser and will pay for it – that’s yet to be proven. Our attention needs to turn now, to consider how we work collectively with advisers to support employers with what they do.”
Aegon regulatory strategy director Steven Cameron says his organisation has always supported a responsible use of consultancy charging. “We believe the existence of an adviser helping an employer delivers benefits to the employer but also to employees. I don’t think that was disputed. What was disputed was whether members would always benefit. That concern won the day in Steve Webb’s eyes. There are consequences. Some employers will not seek advice, not put employees into the most appropriate pension scheme, are unlikely to pay more than the statutory minimum and may default to Nest. This is not risk free by any means,” he says. He describes watching the RDR and auto-enrolment processes coming together as being like a car crash in slow motion.
Premier director Martin Thompson says: “It was already clear that there had to be a demonstrable benefit. Better advisers were using CC for member education. Employers may now say that is nice to have, but we don’t want to pay for it. The bigger concern for me is that market forces that were driving down AMCs could be restrained. At the end of last year, commission schemes were rewritten at 0.5 per cent, not 0.8 per cent. That can only be good. The danger now is you could go to employers and say members are paying 0.8 per cent and we could reduce that to 0.3 per cent but it will cost £x thousands. Employers may say we haven’t got the budget. That could see people locked into higher charging schemes. It is naive to say consultancy charging was completely a bad thing.”
PTL managing director Richard Butcher says: “I support the move in principle and there is no doubt some parts of the advisory community abused commission or CC. But without CC they will go down a no advice or a low advice route or defer Nest which I am not sure is the best outcome. In the real world there is a risk that people will get a less than best outcome as a result.”
Others say it definitely had to go. Lane, Clark & Peacock principal Andrew Cheseldine says: “Why, if I am advising your employer, are you paying my fees? If it was adviser charging it would be a different matter. Fifty per cent of the first year’s premium looked stupid or with an ad valorum cost, why pay it for 40 years? What if 50 people join today, why is someone in ten years still paying for that? It was a horrible mix of cross subsidies and conflicts of interest. But the market needs corporate IFAs.”
He says more of the employer market may pay fees although notes it is not exactly going swimmingly with the big employers.
Deloitte lead RDR partner Andrew Power says there will be less room for advisers, with Nest and the simpler provider offerings potentially benefitting.
There is discussion of what sort of mechanisms could still continue. Some in the market have noted that the DWP statement only covers AE schemes but this is unlikely to be a get out of jail free card.
Aviva head of policy corporate benefits John Lawson does not think trying to get round the rules has mileage. He says: “It is a limited statement from the minister. It refers to consultancy charges in auto-enrolment schemes. There is chat about whether you might be able to offer consultancy charges in non-automatic enrolment schemes. The process would be that you would enrol workers contractually, join them into a pension scheme in the contract of employment. I think the DWP will get wise to that and regulate against it.”
Some are thinking what a substitute system looks like that doesn’t circumvent the regulations.
Cameron notes that many employers have a fixed budget for pensions. “Can we use some of that to support the adviser? If the budget is 6 per cent, 1 per cent might go to the adviser for the first two years, the employees get 5 per cent and it increases to six after two years. I can see employers promoting that as a loyalty bonus and they are paying more than minimum. This approach might work.”
Thompson says: “There might be a solution where you could differentiate the advice charges and have the insurer collecting the advice charge and adding it to the contribution bill. It might not be that difficult. A clearly differentiated contribution and advice charge could have some legs, but whether providers would want to do it is another thing. If a company was putting in 10 per cent, they could charge £50 a member. That could be added to the contribution bill though not with tax relief and with VAT of course. But I think straight fees are probably the way to go.”
Another issue is those schemes already set up on a CC basis. Most say these will have to be unwound, although exactly how that will be done remains uncertain.
Lawson says: “When new employees join on the new basis, you will have existing employees paying for advice through CC. That sort of inequitable treatment just won’t wash in the long run.”
Jelf head of benefits strategy Steve Herbert says: “Where does this leave those AE schemes set up on a consultancy charging basis already. I am sure there is a big chunk of them. Will it be retrospective? I think it has to be. How can the adviser and company unravel what has happened? I assume you have to rip it out of the adviser’s pay and put it into the pension, but I’m not sure if the systems will allow you to do that if it’s being paid by the insurance company and not the employer or employee. I suspect there will be cases where schemes are ready and the adviser may have walked away, having been paid and done what they promised to do, so there is no ongoing relationship. It could be a real mess.”
Cameron points out that is quite possible an adviser will reach an agreement with an employer as to how the scheme is to be structured six months before contributions are paid in. “We don’t want employers to be about to pay in contributions on a consultancy basis and for that to be put on hold while consultancy charges are unpicked and a fee based arrangement put in place. That would be to the detriment of the members and could far outweigh a small amount deducted. Does the DWP statement mean schemes advised on and agreed on or does it mean ones where charges have not been paid in?”
But while some schemes will face this challenge, the bigger issue is how the broader market will adapt.
Lawson says: “If I were an adviser, I would channel my energies into making sure fees works for me. What is an employer going to pay you to do? I am not convinced employers will pay vast amount of money for some things advisers did in the past. Employers will have to go through project management, data analysis, communications, sending the appropriate letters. Feeding that back. That is a brand new process, for advisers and providers and where the pressure point is going to be.
“Tens of thousands of employers, who are about to stage with salary bills of £5m to £10m are not going to baulk at paying fees of a financial adviser. The saga has not worked out well, they should have banned it a year ago, but the timing is quite good in terms of auto-enrolment. Advisers will be able to ask for fees and employers will pay them. Given how much they are paying extra on payroll, few thousand in fees isn’t something to baulk at.”
Cheseldine says: “They will have to put their hands in their pocket and pay fees. They do for recruitment consultants, accountants, payroll bureaux. It could be good for advisers. They have been nervous about charging fees. Now it is the only game in town. If you want advice you are going to have to pay us, if you don’t want advice then it could all go horribly wrong. The really small employers were always going to go to Nest. With 50 to 300 employees, my gut feeling is they will still use corporate advisers because of the admin and the assessment, the cost is quite serious. There are 30,000 pages of regs and consultation. It has got to be worth paying someone to do all that for you.” n
Box – to charge cap or not to charge cap?
Aegon regulatory strategy director Steven Cameron says it is good the DWP is planning around the OFT work. “When the OFT aggregates all the data, we may find the scare stories are truly outliers and don’t represent the majority of AE default funds. Let’s make sure we don’t jump to the conclusion that a very draconian intervention is required just to remove these outliers. If it is based on the facts, and builds confidence that default funds are good value, it could be a positive outcome.”
Jelf heaf of pensions strategy Steve Herbert says: “I would like to think the price cap would be what we have been expecting anyway. If the industry has been foolish enough not to be working on the basis that charges need to be within a spit of Nest, then it is going to get a nasty shock and has no-one to blame but themselves.”
But some see definite logistical issues. Premier director Martin Thompson says the biggest problem with a charging cap is duel pricing with Nest. “They will have to use RIY, and that means nothing to the average person or the press. It would be easier if Nest did away with its upfront contribution charges.”
PTL managing director Richard Butcher’s concern would be if a cap went beyond the default, to restrict the use of target date funds and other multi-asset funds.
Aviva’s John Lawson says: “They are using the fees cap as a stick to say ‘get your act together or else’. But at select committee Steve Webb has always said it is difficult to cap charges because they come in different shapes and sizes. You would have to charge on the reduction of yield and you would have to force occupational schemes into doing tailored illustrations for the reduction in yield analysis. It is not straight-forward and is expensive, as Sipp funds are finding out. I think there is still the possibility this is sabre-rattling.”
That may be, but the industry now knows that the DWP is not averse to intervening in the market.