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A few things to consider before capping charges (and banning commission)

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The Government’s proposed pensions charge cap has been positioned as a dramatic intervention aimed at ensuring the general public is not ripped off as they are half-compelled to save into a pension for the first time.

But it is becoming clearer that the policy, and in particular the suggestion that all current schemes may need to be rewritten and stripped of commission, risks a number of unintended consequences for employers and their staff.

To be fair to pensions minister Steve Webb, these unintended consequences were something he spoke about in a recent interview with Money Marketing. He has also steered away from the usual lazy attacks on commission politicians often love to get involved in.

“Unintended consequences” was also the phrase that leapt out of the recent Office of Fair Trading report into pensions, when it decided against calling for a charge cap. 

Alongside worries about legacy schemes losing valuable benefits, the OFT was concerned a rigid cap would end up as a target for providers to level up to, or if it was set too low would lead to providers lowering quality or imposing less visible charges elsewhere. 

A retrospective ban on commission for all qualifying schemes and forcing them to be rewritten would be a very expensive exercise for employers already struggling with auto-enrolment costs.

The reduction in costs to employees is unlikely to be significant. ABI research (quoted in the Government consultation) suggests average pre-RDR GPP charges are 0.77 per cent and many are much lower than this.

The big problem of charges and exit penalties levied on older schemes is already being addressed through the past business review demanded by the OFT. As my colleague Tom Selby points out, it does seem odd that the Government’s proposed charge cap would be introduced next April, before this review finishes at the end of 2014.

Forcing schemes to be rebroked with commission stripped out may lead to employees paying a similar AMC but insurers keeping the commission which previously paid for advice.

Employers may well be forced to reduce employee contributions to make up for the extra advice and arrangement costs required. In its results this week, Friends Life observed that more employers than it forecast are making the current minimum 1 per cent contribution. 

The Government admits a charge cap could mean less provider choice. A resource-sapping rebroking exercise will lead to even more providers pulling back from offering new schemes. 

Thomsons Online Benefits chief executive Michael Whitfield highlighted in last week’s edition of Money Marketing that the 30,000 companies with staging dates in the four months after April next year “add a serious sense of urgency to overcoming the complexities and capacity issues that clearly exist within the sector”.     

Competition has already led to average AMCs on new schemes falling to around 0.5 per cent. 

The Government’s big concern is that although competition is working for larger schemes, it may not for smaller schemes and therefore a line in the sand needs to be drawn. 

The big OFT and Government worry on commission is not so much the cost but more that it acts as a disincentive for the adviser to look to move schemes in future if a better deal came along.

These legitimate concerns could possibly be addressed through regular scheme reviews, an idea floated by Royal London chief executive Phil Loney in a piece on the Money Marketing website this morning and worthy of further investigation.

Charges can significantly cut into future pension incomes. But the focus on cost without thinking about value is dangerous. 

I always sit up and take notice when the Pensions Policy Institute discusses Government policy. It’s in the rare position of having no vested interests at stake and is not prone to stirring things up for the sake of a few cheap headlines.  

At a Money Marketing event yesterday in London, PPI director Chris Curry suggested the Government saw no value in pensions advice and warned this blinkered view risked undermining value for savers. 

He said: “If you have advice in the workplace that encourages fewer people to opt out and increases contribution levels, even if it costs more, then the value is greater.

 “There isn’t a focus on value at the moment, it is just about making things cheap and using inertia.”

He also suggested the charge cap would benefit few people (mostly those in legacy schemes which are being reviewed anyway and leavers hit by the effect of active member discounts). Curry did say, however, that the cap would act as a positive force in restoring trust in pensions.

Cutting out workplace advice at many firms, as the retrospective commission ban is likely to do, will also have other negative side-effects. 

For example, Master Adviser’s Roy McLoughlin says the commission payments he currently receives help fund his general financial advice surgeries and allow him to offer advice around things like claiming higher-rate relief (which 180,000 people fail to do) or basic savings products (he says he speaks to employees about cash Isas more than anything else).

Also, how many employers would not think about increasing contribution levels without an adviser explaining the possible business benefits?

AMDs, which the Government is proposing to ban, is another example of the value of advice. 

I keep switching my view on AMDs depending on whose arguments I’m hearing. But whatever your opinion, the ban will undoubtedly lead to many savers seeing sharp hikes to their pension charges.

Take the stakeholder GPP I’m part of through Money Marketing’s parent Centaur Media. We currently pay 0.3 per cent per year, with leavers charged 0.7 per cent. A Government ban will probably mean at least a 30 per cent increase in charges. 

What about those charged 0.7 per cent you might say? (even though this is still lower than the Government’s proposed cap). 

Leavers can still benefit from the 0.3 per cent charge as long as they continue to pay in a minimum £16 per month into the scheme. 

But who would tell them that if advice is cut out of the equation?

The Government must tread with care to ensure its reforms do not harm the people it is trying to protect. 

Paul McMillan is group editor at Money Marketing – follow him on twitter here

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. A really interesting and IMHO thought provoking article…

    I’m sure there are many schemes priced where the cost of employer advice is picked up by the members and this clearly can no longer persist.

    I’m also sure that there are many schemes where members pay for advice but don’t receive it….. thereby resulting in a cost for which they receive no benefit.

    HOWEVER…. blunt approaches will always result in unintended consequences and introducing charge caps and/or requiring commission based schemes to be scrapped could trigger unnecessary costs and consumer detriment.

    Like Paul, my view changes depending on the line being taken – my current view is that consumers should only pay costs where there is a benefit BUT I can also picture schemes I’ve been involved in historically where the members are getting very good value but based on the points being proposed they would need to end…..

    The Government, it’s advisers and the regulatory framework need to tread carefully and try and increase cost effectiveness and value the of schemes (notably smaller schemes) without triggering costs in the short term for those who – lets be fair – have been proactive and caring to their workforces prior to being required to do so!

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