Advisers, employers and staff will all ultimately lose out by splitting pension commission
The rising issue of employers working in cahoots with pensions advisers to split provider-paid commissions has rightly drawn severe criticism from other advisers and employers alike.
I can see how some employers may think it clever to impress the financial director by ’earning’ extra money for the organisation through splitting and sharing any commissions with their corporate adviser.
But the bottom line is that the employee is left paying higher than necessary annual management charges – thus funding their employer’s extra earnings. When this wheeze is discovered by staff, which will surely happen, if not in the short term then years down the line, the negative fall-out will far outweigh any gains.
We may not be as litigious here in the UK as our peers in the US, but this does not rule out the possibility that we could see staff here suing former employers which did not live up to their corporate responsibility of offering best value pensions.
This is yet another reason that provider-paid commissions need to be removed and another way found to fund workplace pensions and advice – by using adviser commissions or fees.
Few providers or advisers are keen to put their hands up publicly and say splitting provider-commissions is a good idea – this secrecy itself should be a warning bell to those involved that all is not well.
At the moment too many employees have too low an awareness of pensions, never mind the costs associated with them. But as financial education in the workplace grows, employees as consumers will become more savvy and start asking questions.
An employer wanting to preserve its consumer brand will be severely tarnished by stories of such underhand tactics in the benefits package.
Even employers that are not doing anything underhand need to question the AMCs being charged by some advisers and providers and fully understand why these are being charged at such levels. Everyone needs to earn their crust, but some AMCs are still unreasonable given the level of service offered in return.
Everyone needs to earn their crust, but some AMCs are still unreasonable given the level of service offered in return.
It is no longer good enough to simply say that the AMC an employee pays through their employer is lower than they would get in the individual market so they are better off anyway.
Good advisers and good providers are offering competitive rates, others needs to follow these examples.
Debi O’Donovan is editor of Employee Benefits magazine
This practice, which one hopes is only occasionally conducted, does prompt you to question if any party involved actually benefits. Although the obvious disadvantage is for the member, there could also be significant implications for the employer, adviser and pension provider.
The motives of the employer and adviser must be questioned. Who actually proposes this type of arrangement? You must suspect the adviser in order to win the business, as would many employers realise such a thing could be done in the group market?
The party with the least control in this situation, the members, will be the most disadvantaged, although they probably won’t even realise it. Higher scheme charges will inevitably impact on members’ funds being lower at retirement with the impact being felt more significantly by younger members. The AMC could be 300 per cent higher for the member than necessary, 1.5 per cent instead of 0.5 per cent on a nil commission basis for example.
The party with the least control in this situation, the members, will be the most disadvantaged, although they probably won’t even realise it.
Employers involved in this practice must be motivated solely by financial reasons. Perhaps they have the right intentions, to provide a range of benefits that they ordinarily cannot afford. Or do they need to simply improve cashflow and the company’s financial position. Whatever the motive, it is an unsustainable position.
Switching to a new pension plan with high charges can undermine members’ confidence in the employer. Rather than increasing staff satisfaction, commitment and engagement it could lead to distrust and resentment.
What would happen in the event that the employer has to significantly downsize the workforce resulting in a commission clawback for the adviser? Is it realistic to think that the employer would pay back their share of the commission?
Most pension providers have made attempts to improve client retention and the profitability of their group pension book. Why still offer high upfront commission? Surely this encourages unscrupulous advisers to switch providers again after any clawback period ends.
With our industry facing new challenges surely employers, advisers and providers should be working together to improve the long term future of our industry rather than taking a short term view motivated by maximising commission.
Howard Finch is a director of Citrus4Benefits