It would have made sense to have a clear understanding of exactly how the new system can be made to function before committing to getting rid of the old one. But in the case of workplace pensions, I am yet to speak to a provider who has a well formed vision of how consultancy charging is going to be sold to employees.
’Young and poor victims of new pensions scandal’ was the headline of one national newspaper’s piece on the revelation that Nest will carry an initial contribution charge of just 2 per cent. We all know stealth pension charges, pilfered from innocent workers’ retirement pots by greedy life offices and IFA sharks, are a favourite target for the press.
So how the papers will greet the return of upfront charges of up to 35 per cent of first year’s premiums, as suggested by the FSA in its recent policy statement and final rules on group personal pensions under the retail distribution review, doesn’t bear thinking about.
But this is where we are now and the argument has moved on to making the new rules work.
To be fair, a consultancy charge of 35 per cent of first year’s premium is probably more than most corporate IFAs will think of asking for. But even 10 or 20 per cent of premiums, over one or two years, will not be popular, even if they are actually cheaper for those who stay for a long time.
Taking consultancy charges out of employer contributions may lessen the pain but it will not stop the bad headlines. The press will still argue that the money is being deducted from the employee’s employer pension contributions, which are, after all, part of their overall reward package.
It is true that today’s rules do put more of the costs onto certain groups at the expense of others. People with short service periods are generally subsidised by those who stay with employers for many years.
Key to making a success of consultancy charging will be designing remuneration structures that do not create glaring losers under the new system but that is not going to be an easy circle to square.
The complexities are numerous. With the average employment period of six years, will employees keep paying large upfront payments? What will consultancy charging do for those wanting to consolidate their pension where upfront charges make it less attractive?
How will mobile employees deal with increasing numbers of pension pots scattered around the industry? In future, does the adviser keep receiving a big slice of early years’ contributions from new joiners, even though it did the major part of the work setting up the scheme a decade or so ago?
Could a high consultancy charge be a factor that leads to high opt-out rates by staff auto-enrolled by employers? And what view will the FSA take if such an effect is detected? Should there be an industry-wide decency limit capping levels of consultancy charging or should this simply be a matter between the adviser and the employer? How will length of service be reflected in pension projections?
There is still a long way to go before reality hits and, fortunately for advisers, they will have revenue from existing schemes to keep them alive while they figure out ways to make consultancy charging work for them. But after a decade of persuading the public at large that upfront charges are evil, the industry needs to get cracking to explain that the opposite can also be true.
If it does not, we cannot expect workplace pensions to extend anywhere beyond the domain of employers that are rich enough to be able to afford to pay a fee.
John Greenwood is editor of Corporate Adviser