Double trouble for consultancy charging
Consultancy charging could lead to more transfers out of group schemes by departing members of staff says Ian McKenna, director of F&TRC
Now the FSA is beginning to put some flesh on the bones of consultancy charging it is clear that, as is so often the case with anything related to RDR, the more one gets into the detail, the more the cost of advice to the consumer will inevitably increase. Now consumers will potentially not only face the cost of the advice their employer takes being deducted from their pension contributions, but in addition there will be the provision for an adviser charge to cover any individual advice they receive in connection with the group scheme benefits.
Historically the vast majority of IFAs operating in the individual market have provided advice in respect of any funds invested by the employer as part of a wider process and not charged explicitly for this advice, but offset it against the wider overall revenue from the client.
Now, thanks to the FSA, the rules will provide for explicit adviser charging in respect of the advice to the individual. From the perspective of the individual’s adviser the ability to recoup the cost of these services must be welcome. But I doubt many providers will be enthused by the prospect of having to process perfect matching deductions from multiple firms.
Having had some experience of the complexity of issues this is throwing up for insurers in the individual market I would urge any corporate pension provider trying to get their heads around this process to go and talk to their colleagues in the individual business arena.
To be fair it is my understanding that a small number of specialist Sipp providers already have this facility in place. This is to be applauded and should serve as evidence to other providers of the importance of accommodating such requests.
If we are to have a situation where providers can accommodate charges from two potential advisers, it should follow that the levels of information provided to both organisations should also be equalised. I have been involved in various attempts to persuade group pension providers that the full range of information that would be available to an adviser in respect of pension business written in the individual market should be available to the adviser of any member of a group scheme.
In designing such services it will be important to recognise that the level of detail advisers are seeking as part of such a process is significantly increasing. In order to meet their ongoing obligations under the FSA assessing suitability guidelines, advisers now have to apply far higher tests than even a few months ago.
In practice where this issue is likely to bite is when a member leaves an employer and is faced with the option of leaving funds invested with the current group scheme provider or transferring them to another arrangement.
Where paper processes need to be employed our research demonstrates that for amounts under £50,000 the level of charges an adviser would need to levy to provide a full level of service is in the region of 2.5 to 3 per cent per year. Against this background there becomes a compelling case to move any funds away from the former employer’s scheme as soon as the client moves jobs.
I doubt many providers will be enthused by the prospect of having to process perfect matching deductions from multiple firms
These costs can however be significantly mitigated when the pension provider puts in place real time valuation services which can be used via the advisers client management systems to obtain up to date information on a regular basis. The majority of life companies have invested in the necessary technical infrastructure to support these processes for individual contracts and to group arrangements where the individual is using the same adviser as the employer, but to date failed to extend such service to situations where the individual is being advised by a different firm.
Thus far I am not aware of any of the pension providers from the fund management community making similar investments, so the right answer for any members of schemes with such companies will be to transfer out as soon as you can. Hopefully these organisations will address these particular shortcomings in their propositions before RDR takes effect.
If customers are going to have to pay separately for the advice they receive on investments in an employer’s scheme then is it not fair that at the same time they should be able to benefit from the same level of service as is offered to other customers? For pension providers I would argue that delivering such services is about to become a matter of revenue protection and that those who fail to recognise this may find large numbers of customers transferring out.