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.”