Painted into a corner 
on AMDs

The expected abolition of AMDs will leave advisers, providers and employers pulling in different directions. John Lappin investigates

The Office of Fair Trading’s concerns about active member discounts outlined in its recent report added to an already impressive array of official disapproval, including that of the pension minister and the Pension Regulator.
The debate now revolves around how and when this disapproval will ultimately manifest itself in rules and regulations, who will benefit, who will lose out and who will pay for implementing the changes. Will we see a full ban, a phasing out, or could AMDs even survive in some form but within much stricter limits?
Some argue reform on the strictest terms could cause huge disruption just when the tsunami of employer schemes are due to enrol.
Others suggest that a move away from AMDs is achievable and could even give providers the opportunity to re-price arrangements for the post commission world.
So how hardline will the expected DWP regulations be?
Aviva head of policy John Lawson believes the scrapping of AMDs is now a done deal. “The OFT has been very definite in its recommendation. Steve Webb has said publicly on three or four occasions that he will implement those recommendations. He referred to AMDs – at the Work and Pensions select committee – as deferred member penalties. All the evidence says the chances of AMDs surviving at all are slim to zero.”
Other providers disagree, but the case for a less heavy-handed intervention rests on distinguishing bad practice from good.
Standard Life head of workplace strategy Jamie Jenkins says: “An employer might be offered either a flat price of say 0.8 flat or 0.7 for active and 0.9 for leavers. We think that is fair. Everyone gets a good deal, but active get a better deal,” he says.
“A differential price, where the leaver’s price includes an unfair charge, is bad practice. If it is above 1 per cent after leaving the scheme, not only do you not benefit from a discount, you are getting a worse charge than you could as an individual getting a stakeholder pension. AMDs have been used to subsidise a very low price for active”.
Beaufort Corporate Consulting managing director Robert MacGregor, who supports the principle of AMDs from an employee benefits point of view, says: “Advisers kept trying to rewrite schemes to get the charge lower and lower. Margins got lower and lower and the gap in charges between active and deferred members got bigger. Some schemes even started pushing the higher charge above 1 per cent. Pension providers were paying commissions based on smaller and smaller margins chasing market share from increasingly fickle advisers. This was not sustainable in the post RDR world.”
But he adds: “You could argue that the recent OFT report is coming to the rescue of the pension providers who have committed to keeping commission arrangements in place.”
Hargreaves Lansdown head of pensions Tom McPhail believes the industry may have brought the issue upon themselves.
“The letters lifecos using AMDs have sent out are in opaque language, like they are deliberately trying to obscure from the member the fact their charges have doubled. If the deferred members left in large numbers, the whole pricing structure would unravel. Any system relying on people not acting in their own best interests is flawed. Typically an active member is more expensive than a deferred member which is dormant, so how come they have to pay more?”
Aegon head of regulatory strategy Steven Cameron suggests that in terms of the OFT, what is deemed to constitute penalising of members is key.
“We don’t think it is the same as not having different charges. We think competition is working when employers are able to negotiate discounts from the retail price. As long as the charge is below a competitive retail price, then we believe that is a positive feature. Unconstrained AMDs can create penalties. We don’t offer unconstrained.”
That will be the firm’s lobbying position.
Jenkins says the charge cap could present an opportunity to deal with the issue and minimise disruption.
“If you legislate with a charge cap of 1 per cent, you leave open the ability to have discounts below that. I would like to see AMDs allowable within a cap, even if a cap was only there for AMD schemes.”
Advisers argue a ban is a blunt measure that won’t address issues beyond GPPs.
JLT employee benefits director Mark Pemberthy says: “I applaud the move to transparency and making sure members get good value. Within that, if you have got robust limits and benchmarks, some AMDs fit comfortably within that. There are extreme practices and it is right the OFT identifies those, but to ban AMD is a blunt measure. You disrupt some very good schemes as well as some that should be disrupted.
“With some occupational schemes deferred members pay admin charges and active members don’t. It is not uncommon for trustees of occupational schemes to transfer certain member categories to Section 32s that typically have a higher charge. These are proxies for AMD. I would like a much stronger idea of what good value looks like, not something to a specific to a particular design.”
MasterAdviser partner Roy McLoughlin points out: “Explained properly, members can understand that if you leave an AMD scheme and restart it from £20 a month, you go back down to the active AMC. But not all IFAs explain. We took over an AMD scheme and made sure people knew that. For lots of people, they have got lower AMCs than they would have with what would be called a clean contract.”
Yet if such arguments do not hold sway, significant disruption can be expected.
Pemberthy says: “All the schemes that have been put in place by JLT have given an AMD option, alongside a flat charging structure and organisations have chosen what they want.  Employers like the idea of being able to drive down charges for active members. Clearly if that goes, or a charge comes in, a discussion needs to be had with the employer”.
“With work going on now with AE, it could be a big distraction and it could be chipping away at employees’ trust and engagement. A move to transparency and lower charges is a good thing, but it needs to be done so as not to have unintended consequences around the 2014 and 2015 staging dates.”
MacGregor says the difficulties of unwinding existing AMD schemes are sometimes overstated.
“We will need to set up a new fee-based scheme on transparent charges. These existing schemes may have a level of contributions above the auto-enrolment minima and some assets – This might be attractive to providers who may offer improved terms. There is a belief that these are commission-laden products that have penalties for everything but the likelihood is that anything that has got AMD is post stakeholder. There are not likely to be any transfer penalties. You can change it tomorrow.”
Lawson says: “We are bringing in new members on the active member price, but we are saying to employers, look the Government has made an announcement. It is likely we will have to re-price this. Trying to push it down to the active price for everyone is almost unaffordable. Most advisers and ourselves expect it to settle somewhere between the active price and the leaver price.
“If the new members are quite attractive and the adviser is prepared to give up commission, then the price may be quite close to the active price. On the other hand if commission is still payable, and the new members are not attractive, then the combined price may move towards the ‘leaver’ end.”
He says ultimately Aviva will rewrite these schemes to a single charge and that is what the provider  will promote.
In terms of the timetable, Lawson says: “It might happen sooner rather than later.”
Helm Corporate director John Deacon suggests that removing AMD for existing members within a contract-based environment is difficult given that the policy contract is between the insurer and the employee.
He says: “I don’t think it is that easy to implement retrospectively. There  may well be a legal challenge. As a result, I suspect the solution will be to say from this point, AMD is closed or banned. Anyone auto-enrolled can’t be on an AMD contract. It will wash itself through naturally and in two or three years AMD will effectively have been cleansed.
“Then with the deferred member piece you put in a charge cap, solving the problem for anyone charged over 1 per cent.  In many respects, it is a shame. Most advisers have said AMD was not a bad thing, provided the result was less than 1 per cent, but that has not always been the case”.
Cameron envisages three approaches: “The first is to say there are new rules for brand new schemes or secondly new rules for new auto-enrolees after a particular date or rules for any scheme that might be used for AE. The third option is problematic. There will be thousands of employers who might be told, ‘you can’t use this now and need to find something else’ or who need to make radical changes. That is the risky one because I think the market could fall over”.
Jenkins says employers may be upset as well.
“Some employers have heard there may be a ban, and said we are not terribly happy about that, we do want a differential. We want to reward employers being unfair to people leaving. They will be disappointed. This is not just providers trying to hang on to things. Employers may be stuck in a situation where they are going to have to make a change. On pricing, each scheme will be different. It is going to cause work for employers. Even if you made a change going forward, how does that work in terms of the person leaving yesterday and the person leaving today? What of people who stopped paying, or return to the scheme from maternity leave?”
Cameron adds: “If you have an AMD which is charged at say 0.5 up to 0.8 with an AMD, they won’t move to 0.5 per cent. That doesn’t stack up. But it will be difficult to go back to someone paying 0.5, to say it will be 0.65 per cent. Arguably within the contract, you can’t do that. So that would mean if you can’t afford to continue the scheme, you would need to rewrite the scheme.”
Cameron also asks who has the power to make changes?
“The AE obligation is on employers not providers. If the law says you are only allowed to enroll into certain types of scheme, then it is up to the employer to ensure that.
“That doesn’t mean other schemes have to change. We can’t say it is a legal requirement. We can’t say we are going to change them all.”
However, Lawson says providers have substantial leeway: “Contractually, we have the right to increase charges for existing members. It is not a comfortable thing to do. It is something the industry has never tried. Despite these clauses being available we have never done it. It is going to create a lot more work for the employer, adviser and us, not necessarily with any remuneration because why would an employer want to renegotiate fees for what are effectively charges going up for active members. It is not going to be comfortable conversation but cutting to the active price is unaffordable.”
MacGregor says: “We believe the answer is to move to where you get paid a fee for every part of the process at both employer and member level. Clearly this is not going to be easy and employers, particularly SMEs will have to get used to writing cheques, if they want the services that we have provided “for free” in the past.
“We need to understand what an employer is trying to achieve and create a solution and service proposition that suits. The member interaction is going to be more inclusive, moving to education rather than selling”.
“By way of example, we have completed a communication exercise for a scheme with over 8,000 members and we directly engaged with over 2,000 of them. It was great to start each discussion with a member: “We get paid by the company to have this conversation with you about the benefits they provide and the changes being made. There is no difference to us what decisions you make, our only concern is that we give you best advice, that you fully understand your options and you make the right decision for you.”