Orphaned by levelling down

Pensions reforms will create millions more orphaned policyholders as employers level down to personal accounts says Ian McKenna , director of the Financial Technology Research Centre

Over the past couple of months I have been involved in an increasing number of conversations with advisers who are questioning their ability to provide advice to individuals based on an income of 0.5 per cent of the funds under advice. It is becoming progressively more obvious that, in line with Australia and the US, the overall cost of providing advice to all but the wealthiest clients is more likely to be in the 0.75 to 1 per cent range, and even this level can only be achieved where the product providers involved are delivering all information electronically, to the heart of the adviser’s client management system. Where the provider has not made the investment to support such services, for example organisations with “closed books”, the need to operate on a paper basis will inevitably multiply these costs.

Anecdotal evidence suggests that the correct cost of advice to consumers in such circumstances could be as high as 4 per cent of assets under management each year. Our research search team is presently carrying out a more detailed study on this point, but it appears that creating more orphaned group scheme members will generate another hidden cost of personal accounts that will be passed on to consumers.

This figure may sound high, but if one recognises that the vast majority of providers’ systems do not have the ability to electronically recognise the ability of more than one adviser to receive information, this means virtually all such information requests will have to be processed manually or as phone calls. Invariably it will be the firm that advised the employer that is recorded on the provider’s system so the individual’s adviser may have to repeatedly produce their authority for information. Our research increasingly suggests that the FSA has underestimated the cost of the RDR to the consumer.

We already have large numbers of orphaned pension scheme members as a result of this Government’s last attempt to meddle in the pension system – stakeholder pensions. How many organisations entered what they hoped would be a boom market only to retire wounded, closing their books after a couple of years? The victims of Labour’s last attempt to mandate price are the thousands, if not millions, of consumers, at least part of whose retirement assets are now held on ageing systems which make it difficult if not impossible (and certainly costly for advisers) to give them accurate advice.

Given the present economic climate it is not surprising that increasing numbers of employers are becoming ever more reluctant to pay fees for group pension advice, and there is clear evidence of commission re-emerging as a remuneration method in the corporate sector – until the FSA extends adviser charging to the corporate market.

Consequently we have recently extended our research project on the future cost of advice to include the corporate market. One solution might be a mandatory requirement under TCF for all pensions providers to deliver information to servicing advisers electronically. Even if the regulator does not take such a proactive approach, closed book providers should look seriously at this issue as failure to do so is likely to lead to major cannibalisation of their embedded value as advisers switch client money to providers who are not driving up the cost of advice through their failure to invest.

In creating more orphaned pension policyholders, the Government and Pada will inevitably further obfuscate consumers’ understanding of their income in retirement. The delays recently announced suggest that Pada is finally realising much of their grand plan is a wonderful theory which they don’t know how to put into practice. I believe it is essential that the industry makes it clear to the electorate that personal accounts will mean the cost of understanding the value of your pension will go up for every voter who is part of an employer sponsored defined contribution scheme. I would be interested to share views with any advice firms who may wish to discuss this work and hope to report some of the findings in this column in the future.

You can contact me at ian.mckenna@ftrc.co.uk or on 020 7659 2345.