Trust and contract locked in brawl

Calls for blended fund charges to be treated as consultancy charges could open a pandora’s box for the industry. John Greenwood reports


The extension of the ban on consultancy charging to all qualifying pension schemes and not just those being used for auto-enrolment is provoking questions about the foundation of adviser remuneration across the trust-based world.

The Department for Work and Pensions has confirmed that the Pensions Bill is to be amended to include a ban on consultancy charging on all qualifying pension schemes.The move is a clear challenge to attempts by intermediaries to get around the consultancy charging ban by setting up parallel schemes offering higher than auto-enrolment minimum charges, with employees given the option to opt out of the auto-enrolment scheme into the more generous scheme.

But the move has raised cries of unfair treatment from advisers operating in the contract-based world who argue the trust-based sector is being given an easy ride.

The debate was kicked off by a comment by Legal & General pensions strategy director Adrian Boulding, who told a journalist: “The serious issue with blended funds is there is an ongoing revenue stream going to the investment adviser which is providing that service. To me that sounds like a consultancy charge and we should find a way to disclose it as such. The obvious solution is to have the FCA regulate the provision of advice to employers.”

Some consultants have backed L&G’s position, arguing the charges being deducted from employees’ funds look very like consultancy charges, even if they are being deducted in the trust-based world.

Andy Cheseldine, partner, LCP says: “Putting together blended funds can make sense as it enables you to make quick decisions when needed. But that doesn’t mean you should take money out of them. But why should someone be able to create a product and take a commission out of it?”

But Brian Henderson, partner and head of DC at Mercer, which operates blended funds, argues that charging for expertise that delivers results is entirely justifiable. He says: “A good blend, like a good malt, will have a number of influences that ultimately produce the best result. Best outcomes for members are delivered by adopting best practices, not lowest cost.

Best practices might include asset allocation implemented dynamically or defaults that are modelled to show the best outcomes for members or sourcing, from the best databases, the best fund managers/providers to manage the underlying components. Best practice also includes in-built governance reviewed regularly to keep up to date with current thinking and the negotiations with the managers that also benefit members. Somebody has to own this process or members are not well served.”

Whichever side of the argument you agree with, in purely legal terms the situation is made even more complex by the fact that it is the Department for Work and Pensions, which has powers across all workplace pension schemes, is the body implementing policy on consultancy charging. Yet it is only directing this policy at contract-based schemes overseen by the Financial Conduct Authority. The DWP has said regulating trust-based charges ‘is not a priority area for us’.

The DWP’s policy intention appears to be stopping consultancy charging on contract-based schemes but continuing to allow trust-based schemes to pay consultants charges out of employees’ pension pots, a state of affairs being challenged by some consultants.

It has been suggested that trust-based schemes should be treated differently to contract-based ones because they have a trustee acting on behalf of the member. Consultants’ charges paid out of employees’ contributions are justifiable expenses trustees will only pay if absolutely necessary, it is argued, in the same way that accountants’ and lawyers’ fees are paid out of the fund.

But Thomsons Online Benefits chief executive Michael Whitfield argues in the real world consultants’ fees being paid out of trust-based pots are going to pay for identical services as those that would have been paid for through consultancy charging, namely employee communication and engagement services. It has also been pointed out that contributions from mastertrust providers, such as Now: Pensions, towards employee education and communication, are permitted, whereas such structures are off limits to life insurance GPPs.

Whitfield says: “It is hard to see what difference there is in what is being paid for. And the idea that the trustee is a more focussed purchaser of services doesn’t stand up. Many trustees’ knowledge is no better than the employer’s, the employees’ or the adviser’s.

“It would be unbalanced if commission could continue to be paid out of trust-based arrangements but not out out of contract-based ones.”

Some experts are questioning whether the DWP has fully thought through where the ban on consultancy charges for all qualifying schemes could ultimately lead. Taking the principle to its logical conclusion could lead to a rethink of the entire structure of funding of advice and consultancy services across the pensions world.

Cheseldine says: “If I advise a DB scheme I am paid by the trustees out of the scheme’s funds. How is that different, aside from the scrutiny of the trustees?

“And what is the difference between consultancy charging and ad valorem fees taken out of trust-based funds? If you take this principle to its logical conclusion, trustees can’t have advice.”