Mixed messages on commission

With less than two months to go before the FSA sets out its intentions for how the Retail Distribution Review will deal with the thorny issue of commission on corporate pensions, the industry seems to have no idea which way the wind is blowing.

With one provider pulling away from offering initial commission on group pensions, so another has dipped a tentative toe into the water. Axa followed Friends Provident, Standard and Prudential into the no initial commission camp at the beginning of April.

Their departure was soon followed by the news that Zurich is starting a pilot to test how it might run an initial commission offering. That pilot is being rolled out through a limited number of intermediaries, and the hope that another fully fledged commission player could soon be operating will be welcomed by those firms yet to move fully over to fees.

Zurich is clear that how it develops this part of its distribution strategy will depend on the outcome of the FSA’s work on the RDR and corporate pensions. The fact that Zurich has beefed up its corporate pensions team with a string of strong appointments means it intends to be a significant player in the market whatever happens on the RDR, which will be welcomed by intermediaries.

Dave Lowe, head of pensions at Zurich, says: “We will decide whether we want to continue to pay initial commission in the future. That will in part reflect what the FSA says in its statement due in June about how the RDR will apply in the workplace.

This is a view, not surprisingly, expressed by the three remaining players it is joining in that market. Aegon, Norwich Union and Scottish Widows all say they will be shaping their policy going forward once the FSA has made its position clear.

As to how the FSA will resolve this thorniest of RDR problems, everybody is still guessing. The problem is that group personal pensions and group stakeholders have been treated as quasi-occupational schemes for a long time now, while remaining technically groups of individual contracts. The industry currently sells to scheme sponsors, yet as a matter of law the customers are the scheme members.

If the RDR is to be applied to GPPs and group stakeholders in its purest form then commission will be finished. But as has been pointed out to the FSA on many occasions, the knock-on effects of doing so could be more detrimental to the very people they are aiming to protect. So is this a dilemma that can be solved?

“I don’t think the FSA can square this circle,” says Richard Hobbs, managing director at Beachcroft Regulatory Consulting. “This is a valid issue for the FSA to bite off, but they are very ambitious in doing so. This is a mature regime that has taken 20 years to get to where it has got to, and changing it now in a moment is not possible without the law of unintended consequences possibly causing even greater grief than the problem they are fixing.”

Hobbs, who has experience of the regulator from the inside, says: “A large number of schemes have been set up through commission for years and it is not clear how that is currently done compliantly. Everyone has drawn a veil over it until now, and if the FSA is going to pull back that veil, then difficult decisions will have to be made.”

Stakeholder pensions originally got their light-touch regulatory regime on the basis of a mandatory employer contribution. This employer contribution, it was argued at the time, meant that there was virtually no chance of employee detriment – charges would have to be unfeasibly high to outweigh the benefit of contributions made by the employer.

But while there is virtually no chance of consumer detriment the first time a group pension is set up, when it comes to switching to a new one, consumers can be worse off. A new chunk of remuneration must come from somewhere, the FSA would argue, and that will ultimately hurt scheme members. Such an attitude, however, carries its own risks, says Hobbs.

“Sadly there is too much switching already, but the FSA could cause even more of it by clumsily implementing the RDR. If they insist that all commercial arrangements are brought to an end, that will lead to the renegotiation of existing arrangements. More remuneration comes out of the system and that creates the potential for employers to reduce their contributions,” says Hobbs. “With the RDR kicking in by 2012, this will happen against the backdrop of personal accounts and auto-enrolment, which will be rolled out between 2012 and 2014.”

Providers’ product development experts are all in ‘wait and see’ mode on this issue, signalling there have been no behind the scenes indications as to which way the FSA is going to jump on this issue.

“There has been no leak because there is nothing to leak,” says Hobbs. “My suspicion is they will do a ‘Hey presto’ announcement in June and say ‘what works for individuals works for groups’ – which would mean outlawing commission.”