Edmund Downes, pensions manager at Aviva, speculates on the possible implications if the government was to implement a charge cap on default members of group pension schemes.
Let us imagine a world, not too different from the one we currently have where auto-enrolment is in place and the DWP has already imposed a charge cap on auto-enrolment products. For argument’s sake let’s say that the charge cap is an effective 1%. That is where the politicians have been heading and it could be difficult to justify anything much higher for default members. The problem is that the cap is inclusive of all costs, including sales expenses (including consultancy charges), administration and investment. Now if the employer is persuaded to pay a fee, then there might be a greater margin, particularly for advisers, but if the employer doesn’t, what happens?
Obviously, the split between the provider and the adviser is going to be determined by how strongly each negotiates and reflects how badly they want the business. But, underneath all this has to be the assumption that the charges will also be split in proportion to who is doing the actual work; and the greater the amount of work, the higher the proportion of the overall charge that will be sought. The more efficiently this work is achieved the lower the cost.
So I imagine there is going to be quite a lot of shifting around in this metaphorical tight space, as all the participants seek to get into the position that is most comfortable for them, avoiding elbows and breathing in when necessary. If the walls are closing in, as in the pressure on charges increases, then the need for all parties to co-operate and find the most efficient way of fitting together becomes even more crucial.
So are there any obvious areas where inefficiencies can be avoided? I think there are two areas where generally only the best person for the job should take the lead and one where overlap between more than one party is possible, but this is conditional on their communications being spot on and only one of them sub-contracting for that part of the job.
The first area is member advice and/or initial face to face communications. It is unlikely that a provider will have the skills or the local knowledge to be able to outperform an adviser. The impartiality offered by an adviser means that their recommendations for action are always likely to be more believable than the provider. So the adviser should get the bulk of the charge allocated to this area.
The second is the creation and maintenance of a default investment for the auto-enrolees. The unit costs of such a fund are likely to be far lower the bigger it is, so this is an area where scale is likely to be massively beneficial. Likewise, the costs of governance, communication of any changes and ongoing maintenance are likely to be disproportionate for smaller funds. Default funds are likely to be mainly passive and avoid exotic investments. There are probably only so many ways a fund can be created, and if they all are aiming for the same market, where conformity may have a strong appeal, then why would advisers want to create their own version of what could well be the Magnolia paint of the investment world, especially if the result eats into their margin under the first area?
The third area is one where considerable overlap is possible, and that is administration. Certainly one would expect that the backroom record keeping and member files would be held by the provider, they have already built these systems. But, much of the joining process could be either done through portals owned by the provider or the adviser. It is just a question of who is better for the job in hand.
So lots of give and take, or perhaps push and shove sometimes, in this new rather confined world that RDR and auto-enrolment have created for us. Let’s hope that no-one had a curry last night either!