The consultation for the corporate pension element of the retail distribution review ended on March 16. It became apparent in December’s consultation paper from the FSA that the corporate pension market would see the introduction of some form of adviser-charging – where remuneration and services are agreed with the customer up front and either paid by fee or through a “one-for-one” product charge, matching the remuneration in both timing and amount.
In practice, this charging shape (consultancy charging for corporate pensions) is likely to be adjusted for some of the nuances of corporate pensions.
A good example of this is the proposal that employers, rather than individual members, will agree the adviser remuneration. However, there is still some distance to go before we will have all the necessary detail.
For example, is there going to be a specific qualification for corporate advisers? Can an employer set remuneration for benefits being transferred by an employee from an ex-employer’s scheme?
But whatever the eventual detail, what is already clear at a high level is that the FSA fully intends to ensure the focus of provider competition is very firmly on customer benefits. Providers have often competed, at least in part, on whose actuarial black magic could offer the best up-front commission terms for a given AMC. And therein lies the rub. Such an approach has been, and always will be, fraught with conflict.
The AMC basis points charged to the customer are generally capped at the AMC level of their existing arrangement, leaving the provider to determine what cut of the expected cashflows they are willing to offer an adviser. The higher the cut to the adviser, the lower the provider profit.
This conflict of interest is set to be removed in the consultancy-charging world. Providers and advisers will have separate charges for providing their services, with no involvement of the provider in setting the amount of the adviser’s remuneration. Such an arrangement can only give greater confidence to an adviser and employer that a scheme’s remuneration basis will be sustainable in the long run for future new entrants and increments.
With a significant advice opportunity from auto-enrolment on the horizon, this increased certainty over the honouring of adviser/ employer agreed remuneration could only be good news.
Will consultancy charging provide new opportunities for advisers? The FSA’s stance on remuneration-driven switching is clear. However, the greater certainty that consultancy charging can offer, in what is an uncertain pensions environment for employers, will see it favoured over traditional indemnified commission long before 2013 – particularly if AMC-based commission rates reduce in the run-up to RDR implementation.
Change can often give rise to doubt, particularly when it means moving from a well understood comfort zone. There are many advisers, providers and customers who are not used to adviser/consultancy charging, and are content with the existing model.
However, given the advantages over sustainability for consultancy charging and the need to manage the transition, an opportunity does exist for roadtesting factory gate pricing models now – as many advisers already are.
This should certainly give an adviser’s business a headstart for the post-RDR world.
Fiona Tait is business development manager at Scottish Life