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The FSA is failing pension savers with its GPP proposals
Second-rate policy
Having correctly identified the market failure in the group pension sector, I wonder how Lord Turner feels about choking off even more of the supply of decent contract-based pensions to the nation’s workers. Because that is precisely what the FSA’s RDR Christmas present to the corporate pension sector will lead to.
That there is a market failure, there is no doubt. In 2000, 54 per cent of employees had access to some form of employer pension contribution. Since then, that figure has risen consistently and now stands at 62 per cent.
Take contract-based pensions delivered on commission out of that figure and God knows how few employees would have any pension contribution at all from their employer. And yet that is precisely what the regulator is planning to do.
I have yet to see any proper evidence of the detriment to consumers of commission in workplace pensions - CP09/31 does not even claim to demonstrate any.
Instead, this crucial part of the pension crisis looks like being made worse, simply because the FSA simply cannot figure out how to make its commission ban on individual business work without it.
We all know that GPPs technically do not exist - they are just groups of personal pensions. Likewise, group stakeholders. Yet the powers that be have let them flourish, and flourish is exactly what they have done, because they suit employers and therefore employers are prepared to offer them. Now a business model that has supported providers, advisers, employers and employees for years is to be torn up because the FSA is worried about contamination into the group market.
Its consultation cites the primary reason for the abolition of commission and factoring as being the fear that IFAs currently undertaking individual wealth management will sell group pensions. This has been explained to me as possibly happening in two ways. First, IFAs will get round the RDR’s commission ban on individual business by offering group pensions to individuals.
Surely, the might of Canary Wharf can figure that one out. Just make a rule that the RDR does not apply where there is an employer/employee relationship, a concept already well defined in tax law.
The second area of attack from those commission-hungry wealth managers is they will sell in the group sector because they cannot get up-front commission in the individual market.
Fantastic. More people will have decent workplace pensions, that cover all their earnings, with realistically ambitious investment strategies, that they actually value, rather than the untried and restricted personal account alternative.
Unless and until the FSA shows the consumer detriment, it should support such efforts to help address the market failure that has led the Government to the drastic step that is quasi-compulsory employer contributions.
The other argument the FSA puts in favour of banning commission and factoring is it is doing it for the providers’ own good. It argues the current market is not sustainable and wants to protect the life offices from themselves.
Surely, it should be for market forces and the experts in the distribution of workplace pensions working in life offices to decide that, and not some civil servant in Docklands.
So workplace pension distribution is to be choked off because that is the only way the FSA can make sure its plans for the wealth management sector can be implemented effectively.
In terms of social policy, they are therefore sacrificing the financial needs of some people with little or no money, for those with loads. The typical IFA client has assets of tens or hundreds of thousands of pounds. Yes, some of them may get a better deal as a result of the RDR. But hundreds of thousands and in time perhaps millions of low-earners will get second-rate pensions. All because the FSA cannot separate the workplace from the individual market. Brilliant.
John Greenwood is editor of Corporate AdviserMoney Marketing
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Readers' comments (5)
Man in Black | 7 Jan 2010 4:45 pm
I am generally against what the FSA is doing with RDR, but this article is naive and simplistic.
Banning upfront commission will not choke off access to "good" GPPs - it'll choke off the repeated churning of whole schemes every couple of years with little advice being given to individual members. And with this soft-compulsion coming in, employers who are not sold GPPs will have a choice: get a good GPP or contribute to crap Personal Accounts.
There are lots of reasons to criticise what FSA is doing. But pretending the world will be a worse place because bad salesmen masquerading as "Benefit Consultants" will actually have to do some work if they want to get paid (rather than collecting tens of thousands for getting Scot Eq to do a few presentations for them) is not one of them.
Of course, more targeted measures would have been a better bet for FSA: e.g. banning initial where there's no individual advice, or where an existing scheme is being replaced with 5 years, or mandating clawback where ongoing advice ceases...But FSA are not the only ones who lack common sense when it comes to this aspect of the RDR debate.
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David Trenner - Intelligent Pensions | 7 Jan 2010 5:14 pm
Good article John; there's nothing to disagree with here!
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Alan Lakey - Adviser Alliance | 7 Jan 2010 5:54 pm
An eminently sensible article which could equally be pointed at individual pensions where two Charles River analyses has shown no commission bias or consumer detriment.
In fact it could also apply to all lump sum investments bar with profit bonds and distribution bonds where the same research found no problem.
Intelligent and balanced regulation would not seek to foist unworkable solutions to mythical problems and then tell us that it's all in the best interests of the consumer and the industry.
In a word - WRONG
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SteveParkes | 7 Jan 2010 6:32 pm
I don't believe John Greenwood's article is either simplistic or naive. I responded at length to the original RDR document particularly in regard to the corporate pensions market which is 90% of our business. Predictably my remarks were completely ignored by the FSA who are obsessed with the idea that the payment of commission automatically prevents an IFA from being unbiased when providing advice in this market. I suggested to the FSA that the way to prevent commission bias was the re-introduction of a maximum commission agreement which would then allow a system of remuneration which is currently acceptable to all parties, clients, IFA''s and plan members, to continue. I did point out to them that the original maximum commission agreement back in the seventies and eighties was banned by the office of fair trading as being anti-competitive. The FSA will not however be convinced that their proposals will become anti-competitive as clients will become locked into old inefficient GPP's because they will not be prepared to pay IFA's fees for providing the service they have been providing for years on a commission basis
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Man in Black | 10 Jan 2010 4:38 pm
Steve, I thoroughly agree that an MCA would have been a far more sensible approach to the remuneration issue rather than RDR.
But if the Providers in the GPP market were asked (or "encouraged") to sit down and conclude a Maximum Commissions Agreement, what do you think would be the result for the GPP market? Do you think they'd agree a system/rates whereby they collectively lose money hand-over-first? Or do you think the result would be one where the Product Providers could actually turn a profit? i.e. distinctly lower and/or restricted commission rates?
The BULK of FSA's approach to RDR has been fashioned by a mis-placed belief in saving the business books and profit margins of the old Life Industry. McCarthy said this at Gleneagles and the papers on GPP seem fairly explicit about this.
Interesting that most of us who oppose RDR do so on the basis of how it impacts on availability of advice...yet this argument is strangely absent from the GPP Salesmen. Why? Well, because in the main they're not giving advice to individual members, are they?
The issue about anti-competitiveness of RDR is a good one. I believe RDR errects dangerous barriers to entry into the sector and by imposing costs and additional hassle, will be biased to scale (i.e. it will hurt smaller IFAs more than large firms).
But come on, can anybody call the current GPP market competitive? You can count the Providers on one hand...Why? Because all but a few cannot afford to play the commission game. And it's not as if I've ever heard any GPP Salesmen masquerading as 'Benefits Consultant' calling for non-Life Company players to enter the market...
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