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Steven Cameron, Viewpoint
The X factor
The consultation paper, Delivering the Retail Distribution Review, sets out the FSA’s thoughts on applying adviser-charging to the corporate pen-sion market - group personal pensions, group stakeholders and group Sipps (collectively defined as GPPs).
On the whole, this strikes a sensible balance by tailoring the general RDR principles to specific corporate market needs. Consultancy charging or advice or services to employers will improve clarity, engagement and persistency. Allowing employers and adv-isers to agree a standard tariff for members who take personalised advice retains streamlining. Applying equivalent rules by banning commission on occupational defined-contribution “contracts” avoids accelerating regulatory arbitrage and allowing commission to continue for new entrants and increments within existing schemes is the only pragmatic option.
But there is one huge risk in the paper - the proposal to extend a provider factoring ban to GPPs. Aegon strongly favours a limited form of provider factoring for regular-premium contracts. Pure matching means if the adviser wants/needs paid up front for initial advice and the individual/employer cannot or will not pay a fee, then the full advice cost must be deducted up front - returning us to nil-allocation periods.
In the November 2008 feedback statement, the FSA admitted factoring “is most likely to be required by less affluent customers when purchasing a regular-premium life insurance or pension product”. But since then, it has suggested there are very little regular-premium savings anyway. This ignores not only many self-employed pension savers but also three million employees who benefit from regular tax-efficient GPP savings in 2008.
The FSA has also suggested that people typically have extra money saved to cover fees. Really? Or can arrange separate borrowing to cover this cost. Again, really?
In its determination to eliminate any possibility of bias re-emerging, the FSA is taking a major risk with the financial futures of millions of individuals who need to be encouraged to save more for retirement. The latest CP states: “We do not accept our proposals will necessarily lead to a reduction in take-up.”
Aegon believes that this statement relies on at least one of three wishes coming true:
l Will employers pay separate fees when receiving advice or services? Some will, but anecdotal evidence suggests that current economic conditions will reduce, not grow, this number.
l After 2012, will advisers spread payment for initial services over a number of years? Again, economic conditions and a scarcity of capital make this unlikely for the majority.
l And will employees join schemes even when the first few months’ contributions are swallowed up in charges? Under automatic enrolment, some might not notice but we should not base policy on this.
No one can deny the major risks inherent in a factoring ban. The cost-benefit analysis just does not stack up, particularly in the vital corporate pension market where an employer contribution almost guarantees suitability.
Aegon believes a form of standardised factoring offers the solution - and without the risks. Can the FSA offer evidence why this would infringe competition law? There is little point “curing” the industry of bias if the medicine to do so - in the form of banning factoring - kills large chunks of the savings market.
Steven Cameron is head of business regulation at Aegon
