Aegon’s cash reimbursement – Naughty or nice?

Aegon’s audacious cash reimbursement plan enters new ground in adviser remuneration. John Greenwood reports

Steve Cameron, Aegon

Aegon’s offer of a payment to employers equal to half their first three months’ auto-enrolment contributions is certainly an innovative way to combat the restrictions on distribution created by the Retail Distribution Review. The provider is confident it has all its regulatory ducks in a row. Rivals meanwhile have been critical of the move, suggesting it is at odds with the principles of the RDR and querying whether it breaches regulations and HMRC tax rules.

The deal sees the provider make a ‘reimbursement’ to employers of half their first three months contributions six months after their staging date if they place their auto-enrolment scheme on its new Aegon Retirement Choices platform, a payment which the provider says is to compensate them for the costs involved in dealing with auto-enrolment. That leaves advisers in the position of being able to offer to deal with auto-enrolment at no extra net cost, where a fee is paid equal to the rebate, something not possible under the FSA’s current interpretation of consultancy charges, which says deductions for advisers’ costs cannot bring contributions below auto-enrolment minimums.

But some have expressed the view that the strategy is squarely at odds with the principles of the RDR.

Tom McPhail, head of pensions research at Hargreaves Lansdown says: “This looks highly questionable. There is a degree of sleight of hand involved in taking what will ultimately be in people’s pension pots. Aegon may say there is no differential pricing between schemes that take it and those that do not, and that the money is being paid out of their capital. But ultimately everything comes from members’ funds.

“It runs contrary to the general principle that money goes from the employer and the employee to the provider. We have seen deals in the past where the intermediary has taken commission and then paid some of it back to the employer as a kick-back to secure the business.

“And if this is used for schemes in the staging process, then the amounts will not be very big. So this makes it more suitable to rebroking existing schemes where contributions will be higher.”

Steven Cameron, head of regulatory strategy at Aegon says: “What we’re offering employers is very different from the FSA’s concept of ‘rebates’. The FSA is looking to ban fund managers or product providers from keeping charges unnecessarily high and then systematically rebating product charges either to the platform service provider or in cash into platform cash accounts. Their reason is to avoid charges being hidden or to circumvent RDR rules. In particular, they are concerned that payments in cash into the client’s cash account could be used to cover AC – and that advisers could make it look as if the advice is free or being paid for by the fund manager.

“What we’re doing is very different. It’s a reimbursement to the employer for the time and effort they’ve put into embracing their pensions reform duties – through our workplace platform.”

One source contacted Corporate Adviser suggesting the strategy breached an FSA guidance leaflet from 2005 – Promoting Pensions to Employees – which says ‘you must not be paid commission or receive some equivalent financial reward – such as a reduction in motor fleet insurance premiums – if your employees join your pension scheme’.

Cameron says this FSA guidance was issued to clarify to employers those situations where it was OK to discuss the pension scheme they offer with employees, arguing the employer will not profit from the scheme, and pointing out it is the adviser who will be promoting the scheme.

Ewan Smith, Managing Director of Scottish Life says: “I’d be very surprised if FSA and TPR were happy with this approach. There seems to be a serious conflict of interest for the employer.  And there must be a suspicion of the provider influencing the remuneration arrangements between the adviser and the employer, which is completely contrary to RDR principles.”

John Lawson, head of pensions policy at Standard Life says the reimbursement would be linked to the contributions in tax terms if the money could be recouped by Aegon, for example if the scheme switched. Lawson says: “55 per cent tax applies to cashbacks when the provider has the right to claw that back”“If Aegon is giving away free money with no strings attached, advisers may want to consider the opportunity to game that situation for small schemes’ benefit.”

Cameron says he cannot see employers going through the rigmarole and cost of auto-enrolling their staff into a scheme only to switch it six months later.

Aegon has made a bold move that is dividing opinion across the pensions sector. Advisers and providers will be watching keenly for smoke signals as to whether this strategy will become mainstream.