The RDR has changed the pensions market for ever for advisers taking commission. John Lappin asks what the new world will feel like
The 1 January 2013 RDR start date arguably represented less of a cliff edge for workplace pensions than it did for the retail pensions and investments market. Commission was banned of course, but schemes set up before the end of 2012 could continue to pay it, including – crucially – for new joiners.
This lack of a clean break has, according to many market watchers, slowed the pace of change and allowed advisers to put off some difficult decisions. But the absence of commission going forward, even for advisers who have taken their fees from commission payments, means that things will never be the same again.
Deloitte lead RDR partner Andrew Power says: “You will see change start to come through in the second half of the year. A lot of business was done under the pre-RDR rules. New business written in Q4 may be processed this year, so it may look like volume for 2013. It will be quarter three or four when you see the impact.
“There will be pressure on the margins of providers because intermediaries will continue to control things. The customer who wants cheap and cheerful will go to Nest, but otherwise you will get a concentration of five or six big providers,” he says.
In the new world, assets should also prove stickier. Power believes that churning will go down, but scheme movement won’t reduce to zero. Providers will still come up with new propositions that may be better than existing schemes. This could see still result in wholesale transfers, or perhaps new schemes might be used for new members.
He suggests advisers may also feel the need to justify their fees by moving schemes, after perhaps 10 years, though the rate of transfers will obviously be slower.
Financial & Technology Research Centre managing director Ian McKenna has a different take on the effect on competition: “You have employers wanting more help, while the consumer lobby and legislators are saying that the charge for such help can’t come out of the contract. We have a surplus of demand over supply, yet people are saying the price must come down. But basic economics say there is only one way supply can go. We could be heading for a serious crisis.”
McKenna says there are signs that firms are vying for qualified personnel – a factor that would normally put pressure on fees and charges.
Scottish Life group head of communications Alasdair Buchanan says: “A GPP can still continue on commission for new entrants and for increases in contributions. There is that anomaly. There is less likelihood of switching, certainly from the holding adviser, because a switch would interrupt the remuneration. There is an unhealthy aspect to this.
“Then again, we won’t see the continual movement that Ned Cazalet highlighted in his Polly Put the Kettle On report. But for the rest of the market, for new business, it should still be competitive and it won’t be a matter of who can pay the highest commission rates.”
JLT employee benefit solutions director Mark Pemberthy says: “We expect scheme persistency to increase over time. You would still expect bad schemes to be moved – schemes that were underperforming. But you would expect less. There have been schemes moved for financial reasons, though it has allowed advisers to drive down costs for members at the expense of the insurers. That will stop, but it is a slow burner. We don’t see that panning out for a couple of years.”
Pemberthy says that until 2012, the market was clearly divided between commission paying and non-commission paying schemes: “Commission payers did some nil commission business, but not much. It was polarised. That no longer exists and providers are looking again at their business model and distributor relationships. These are changing, exacerbated by autoenrolment. Providers and advisers are wrestling with the question of what a good scheme looks like.”
Defining a healthy market, Buchanan says it will be one where schemes are being switched for the right reasons. Although it will always be a subjective call, the adviser needs to demonstrate why a switch is beneficial, whether on grounds of service, value for money, lower charges, investment, technology and/or communications. All could prompt a move.
“That has to be healthier,” he says. “The old system wasn’t necessarily all bad, but it was an unhealthy situation that was driving activity.”
Pemberthy adds: “Good governance should dictate that there has to be some movement to enable sufficient quality to be deployed to members’ benefit. The barriers to moving become much more significant in auto-enrolment. There are more members and schemes are plugged into middleware, payroll or a provider’s solution. It is not just a communications exercise – it is a business systems exercise.
“Over time, there will be less scope to negotiate lower charges so the governance aspect will be looking to measure scheme performance over longer cycles. They will be given more of an opportunity to improve underperformance.
“In the historic marketplace, after four or five years you could get substantially lower charges, and pay for moving schemes, because providers were prepared to buy the business. Schemes will still move, though it will be slower, with different headline drivers.”
Beaufort Corporate Consulting managing director Robert MacGregor says: “Of the employers that have existing schemes, almost all were set up by IFAs who were still drinking from the initial commission pool.
“Apart from one or two specialist EBCs, advisers haven’t got themselves sorted. Some of them are looking in their rear-view mirror, thinking it was lovely. We have all got to stop looking in that rear-view mirror.” He adds that some clients may even have obtained better terms in the final days of last year than could be had now, with some amazing deals done on charges “in the last few minutes of 2012”. But overall, firms have to modernise and come to terms with the end of commission.
MacGregor says: “It is forcing us to do what we should have been doing anyway, which is not looking for a hallelujah moment for cash flow this year, but adding to the business in the long term. In the old days, you had a good time when you pulled in a big GPP with a big chunk of commission. Now it is requiring us to look at costs and do what we should have been doing all along.”
MacGregor predicts there will still be a big problem with getting clients to pay fees with a cheque, though attitudes vary employer by employer: “Some will pay some of it, but some won’t, or they would have all along. Writing out a cheque for 10 or 20 grand is not going to happen in a lot of cases.”
He suggests a number of adviser firms are looking at the investment strategy and how to make that pay for employers, employees and the adviser.
MacGregor says the answer is to take a tiered approach to offering services for different clients and to develop a business strategy, particularly around the investment service.
He says: “You have to be more structured. Investment is key. What you get out is based on what you put in, how long you put it in for and what returns you get. Focus on the growth in a way that works financially for that middle section, not the DFM, or HNW part of the market – perhaps for those on £20,000 to £80,000. It is helping to get them a proposition relevant for them at the right price.”
Some advisers admit off the record that they remain busy with schemes set up on a commission basis prior to the deadline, and this has meant they have yet to confront, in a major way, the need to charge fees.
Syndaxi Financial Planning managing director Robert Reid says even established employee benefit consultancies are facing a struggle in moving away from commission. “They were hoping that consultancy charging would be coming through,” he says.
Roderic Rennison, director of The Ideas Lab, which helps advisers adjust their businesses, says all businesses need to adjust to the end of commission.
He says: “I don’t think many commissions will continue in any way, shape or form, so in the context of existing schemes I would be very clear about the value of the services I offer and convert them mentally to a fee basis. If they don’t want to pay this way, I would walk away from it or offer scaled-down services.”
Some smaller advisers don’t necessarily have to worry about a transition or a risk to legacy income streams.
Pemberthy says the vulnerable section of the adviser market is the part focused on member services, but there is still a strong case even there. “If you look at all the factors that apply to auto-enrolment, DC governance and firms with DB issues, there are lots of things that employers need to be taking input on. Organisations with strong corporate relationships will be having different discussions. Organisations focused on member services have been heavily subsidised by commission. That stops on new schemes.
“If they are not in a position where they have got the skillset to move from member services to corporate services, it could lead to casualties. From our point of view, we were active in the commission and fee-based markets. We are busier than we were before. But we think member services can drive better member outcomes. However, the industry must prove that any spend paid by the employer or the members is building better member outcomes. If they can do that, there is no reason the industry cannot continue to thrive.”
With so many factors still up in the air, uncertainty about the future remains. But with more than a million employers due to implement pensions in the next five years, any flexible business should find a way through.