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Can consultancy charging work?

John Greenwood says the industry is struggling to make consultancy charging work.

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


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. john, thank you for some common sense views. There are a couple of life co’s out there who could benefit from listening to you as they do not understand the difference between perception and reality. A 5% contribution charge over 5 years with factoring will not be as unpalatable as a 20% 1st year charge

  2. huw frederickson 8th July 2010 at 3:40 pm

    Thanks for giving the elephant in the room an outing John. Our employee benefits consultancy has looked at this consultancy charging issue every way possible and discussed it with clients…and concluded that it is totally unworkable. So all our work will be carried out with clients willing to pay a fee for managing the benefits package as a whole, and as part of our brief, we will be seeking monocharge contracts from providers at, for example, 0.3% AMC, which we already obtain easily enough. Clearly these terms are far better than the NEST 1970s dropped allocation rate model which our team can barely believe is seriously being proposed.

    It seems that advice and proper support from qualified persons will only be affordable by wealthy individuals and well funded employers in certain market sectors. Everybody else will lose out. Wouldn’t a cap on commissions or something like that have been a lot easier and fairer?

  3. Adviser charging on regular non GPP plans allows for recovering costs over a maximum 2 year period without factoring. I agree 20% over 1 year would be unpalatable, but 10% in each of the first two years with no factoring, but the employer agreeing a renewable 2 yearly contract may be mroe acceptable to all parties. Is factoring really necessary if the employer is committed to a contractural 2 year use of your services as if the IFA firm needed up front monies, they could borrow (whoops of course that would affect their cap adeqacy wouldn’t it, so the directors would have to borrowin personally and inject cash as increased shares or a suborindated loan).
    Anyway anon, I hope you see where I am going on this. Just rtying to discuss options publicly. You may move my thoughts by discussing it, but these are my initial one on this.
    As a firm, we’ve got to relaunch our proposition for employers (including those we alredy have) to prepare for adviser charging, but I am in no hurry too all the time everything else is so much up in the air.

  4. Doug Johnstone 9th July 2010 at 8:44 pm

    At last a jounalist who understands the issues.The eartly leaver is really hit hard under Consultancy Charging but all my attempts to get a sensible response from the FSA have so far failed and I am now tryting to get it into tjhe political arena.

    Customer charging is the right way ahead as long as the FSA concede on factoring ,with the risk being borne by the adviser on transfer withingh the fsctoring period.It will still hit the early leaver more than the present model but nowhere near as much as under the FSA proposals.

    Scottish Life have a factoring model ,which while too expensive, is on the right lines

  5. Has anybody tried launching their own group pension scheme? Seems easy once you’re through the layers of bureaucracy (FSA, HMRC, TPR, contracting-out etc).

    Charge 1.5% AMC – out of which you could get away with paying c.0.5% (passive) investment costs – and maybe 1% initial. Whilst you then need to deal with ‘member events’ admin, it seems that servicing IFAs (even those who don’t advise) effectively do this anyway, and an effective admin system ought to make economies out of what is currently duplication.

    Not feasible for small IFAs I appreciate, but ought to be perfectly feasible for larger benefit consultancies and allow you to build platform style recurring income outside the consultancy charging regime…assumign they are benefit consultancies and not just GPP salesmen looking to churn schemes every couple of years?

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