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Auto-enrol commission ban will create ‘contractual nightmare’

The Government has been warned proposals to ban commission from automatic enrolment pension schemes will create a “contractual nightmare” for pension providers and advisers.

The Department for Work and Pensions last week published a consultation setting out proposals to cap charges for auto-enrolment default funds. It is consulting on a charge cap of 1 per cent or 0.75 per cent, or a two-tier “comply or explain” cap. 

In addition, it has asked for views on whether commission should be banned in auto-enrolment qualifying schemes.

It said: “There is some anecdotal evidence that there was a spike in sales of group personal pensions in the months leading up to the introduction of the RDR. If this spike in sales was a rush to set up schemes with commissions to be used for auto-enrolment, this would be a cause for concern.

“The OFT is concerned that employees may be automatically enrolled into schemes that contain built-in adviser commissions.

“It is also concerned that commissions create a barrier to employers switching to a better-value scheme, firstly because of the costs of selecting and managing the transition to a new provider and secondly because of adviser conflict of interest in switching from a scheme with built-in commissions to one without.

“We are interested in receiving views on whether commission should be banned and any evidence on the potential impacts of this measure.”

The DWP has also asked for evidence of an increase in sales of defined-contribution schemes with commission in 2012 and of how much, on average, this commission increased the annual management charge for these schemes. A ban, if implemented, would have a retrospective impact on all schemes being used for auto-enrolment.

Thomsons Online Benefits chief executive Michael Whitfield says: “Removing commission from pre-RDR cases will be a contractual nightmare for providers and corporate advisers. The problem is, this is all up in the air and our clients are concerned they will be paying bills that they never thought they would have to pay.

“The question is, where will this leave people who are already in a scheme? 

“Providers could end up running two sets of charges: one for those who joined before auto-enrolment and one for those who joined post-auto-enrolment.”

Syndaxi Chartered Financial Planners managing director Robert Reid says: “This was inevitable. It will create a huge amount of work because schemes will need to be repriced and the providers will lose out because most of these schemes have been around for a long time.”

Experts have previously warned that banning commission for auto-enrolment could cost advisers up to £150m and 1,000 jobs.

In an interview with Money Marketing last month, pensions minister Steve Webb revealed the Government was considering banning adviser commission in auto-enrolment schemes but remained concerned about potential “unintended consequences”.

He said: “Commission is one of the things we are looking at. Clearly, people entered contracts a long time ago on a certain basis and, if we were to do something about commission, we would need to know what we were getting into.

“You can see parallels [with consultancy charging] but you just have to avoid unintended consequences. There is always a risk that you squeeze the tyre and something else just pops up, so you just have to know what you are doing.

“We know a certain amount but we need the market, including providers and schemes, to tell us more about what the impact would be.” 

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Moan, moan moan! Our industry milked the commission route for all it was worth, with no thought for anyone but themselves and their bank balances.

    It’s about time we woke up to the fact that the pension market has changed. Adviser propositions needs to change and change quickly.

    Adapt quickly or get out of the market.

  2. Pension Revamp

    Not a case of moaning just wanting to know how we can charge for the advice after all how can you set up a proposition when the regulator changes the rules so often!

    My opinion at present is not to offer auto enrolment advice until we have a clearer definition of how we are allowed to charge unless the client is willing to pay for all of the advice upfront. Lets face it how many employers are going to pay for the advice upfront particularly those businesses that may have cash flow issues.

    Effectively putting all of the liability on the employer will kill jobs and encourage employers to break the law.

    This ill thought out policy and Mr Webb needs to realise that advice needs to be paid for somehow and most important realise that pensions are sold yes that dirty word (SOLD) !

  3. @ Pension Revamp – Your industry might have, but I certainly didn’t. What is your industry by the way as I can’t check as you have posted anon. Are you a non regulated pension liberator perhaps?

    Once again I agree with Peter Herd’ comments above. We established one GPP for a client earlier this year and that is IT. We were considering continuing our process which we started in 1998 of helping small employers with single charged GPPs and then single charged stakeholder a few years later, but have taken the foot off the pedal since 2007 due to uncertainty about the future. Continued uncertainty makes it inappropriate to assist with auto enrollment OTHER than for existing clients. That doesn’t mean existing clients who have GPPs only, just existing clients who already value our services and are willing to pay, even if they have not chosen to effect a GPP to date or we have advised them NOT to due to staff demographics or APATHY.
    We might start to roll out auto enrollment to non client employers as we have done it well for more than a decade, but to be quite honest, why should we bother. We did with Stakeholder and we lost money as did the insurers.

  4. Philip, I’m an IFA who has watched with despair how our industry has mismanaged and misunderstood group pensions for as long as I can remember. You and Peter may not have milked the system, but plenty of others have.

    Joe Blogs needs an easy to understand, well managed (from a risk perspective) pension plan. He/she is not interested in listening to our promises of how this manager can do this and that manager can do that. He’s heard it before and seen it fail.

    We can’t deliver the individual advice to scheme members that we used to (ha bloody ha!), so let’s not try. Instead, try focusing on how to provide a value for money solution to employers. Don’t try and charge what you used to but charge to cover your time and cost. Embrace the use of master trusts and realise that their investment governance is far, far better than anything that exists in the GPP market.

    It’s about time our industry got its head out of its backside and started to deliver.

  5. @PR – OK I agree with that although I am not convinced of the master trust argument.

  6. Pension Revamp

    Totally agree with your points, however, how do you charge for auto enrolment as The Pension Regulator seems to be turning around and banning this and banning that and providing no guidance on what we can expect charge for advice and ongoing servicing.

    The Pension Regulator often acts like a schoolteacher wagging its finger at the supposedly naughty pension industry , well there are also some very hard-working financial advisers with ethical viewpoints who would love to offer auto enrolment advice but steer well clear of it due to the fact that we have no idea how to charge.

    It’s okay going around saying that you going to ban consultancy charging but advice has to be paid for and what our industry needs is sensible guidelines and systems that are put in place for more than one or two years.

    My advice to The Pension Regulator and Steve Webb is stop seeking headlines to please the press and continue to scare the general public on pensions and work with the industry and tell us exactly what you feel is the ideal charging structure and remember that we are not charities we are commercial entities who need to make a profit.

  7. @Peter Herd – Scot Life have a charging spreadhseet you can use to structure a fee based approach to group and auto enrollment business. You can use it for any providers pensions, not just Scot Life and brand it as you please. Speak to your broker consultant and get a copy or I’ll email it to you.

  8. Peter, I’m not willing to give details of our charges on-line, but will ring you on Monday if you’d like. Let me know. Phillip, we’ve looked at the Scot Life fee sheet. The reply from most of our clients would end in off!! We’ve had our reservations about Master Trusts as well but now see them as a valuable tool for employers who are unwilling or unable to pay for a more comprehensive solution. When you compare it to the “old” way of the adviser seeing each employee, making fund selections and then never seeing them again, they are an improvement. The investment governance is far better, and, it is not your responsibility!

  9. Hi Phil

    That would be very helpful my email address is admin@essentialifa.com.

    Many Thanks
    Peter

  10. How about seizing the opportunity and having a go at setting charges. The market will soon tell you if you’ve got it right or not. Most other industries don’t sit around waiting to be told how to charge, they get on with it.

    Financial Services does need to change. Those that stick their head above the parapet stand most chance of winning, very few will fall if they take care to research and adjust and then feedback internally as all modern businesses should.

  11. Spot on Helen.

  12. @Helen, whilst i don’t disagree, the problem is the goalpost keep moving. I’d drafted my new terms for group business in April last year, but unfortunately I did it over the weekend our server failed so whilst I didn’t loose any working week stuff I lost what I’d done that weekend. I was REALLY glad I didn’t spend another weekend doing it when consultancy charges changed AGAIN and until it does all settle down, I’ve got enough other work to get on with, I just will NOT be taking on the extra admin support I’d lined up which groups scheme work often requires. Pity for the 21 year old who could have done with the work now, not next year.
    Government keeps fiddling and small businesses will just change direction and not recruit OR as the banks did, lay OFF staff until RDR has failed and they can then get “simple advice” through with a nod and a wink, but charge the same as full advice.

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