Although a number of question marks remain over how the retail distribution review will be applied to the group pensions market, it is clear that the spotlight is being firmly shone on commission and disclosure.
The FSA’s latest consultation, some two-and-a-half years into the review, places even greater emphasis on ensuring that workplace pensions come under the new rules but the industry faces another round of consultation before it can start planning for the post-2012 regime.
Delegates at last month’s Corporate Adviser round table, Countdown to 2012 – Shaping The Delivery of Workplace Pensions, argued that the industry needs to come up with new ways to help employers pay for private sector schemes.
Paul Goodwin, head of pensions marketing at Aviva, believes that the major stumbling block is the idiosyncrasy of the group pension market, with the employee ultimately the client but the employer negotiating the costs and typically paying them.
As such, there is uncertainty around how exactly the regulator’s proposed adviser-charging regime will be applied to the group personal pension market, particularly when so few members actually receive any form of individual advice.
“With the FSA at the moment, it depends on who you speak to as it keeps changing. Part of the reason that they have put the questions in the consultation paper about how they should apply adviser charging to GPPs is that they just do not know and they do not want to risk killing off workplace pensions,” said Goodwin.
What is thought to be certain is that the giddy days of high upfront or indemnity commission are over with the regulator favouring charging and remuneration structures along the lines of factory gate pricing. “It is quite clear what the FSA wants to do around factoring and it is more around how we disclose adviser charging,” Goodwin added. “One principal that is driving the RDR is building sustainable business models and they recognise that the capital strains caused by writing that business is unsustainable. We have to accept that factoring as we know it will disappear.”
If high levels of indemnity commission were the lifeblood of many corporate advisers, the fallout from the removal of this line of remuneration is expected to be massive, although many in the industry have little sympathy for firms that effectively built their businesses on the need to pull in more revenue through writing new schemes rather than focusing on the ongoing servicing of the client and understand why this is firmly on the FSA’s radar. Those product providers still active in this end of the market also have to face up to the fact that they will have to win business through a different approach, no matter how painful that may appear in the short term.
Robin Hames, head of technical, marketing and research at Bluefin, believes that the market was heading this way anyway and the FSA’s regulatory intervention is more about accelerating a key market trend rather than reshaping it.
Hames said: “Regardless of the RDR, I think the market would face this because a lot of insurers have got huge books of business written on unprofitable terms that they will lose to personal accounts.
His argument is strong and the costly nature of writing group business on a high upfront commission basis has been all too readily demonstrated by firms such as Standard, Clerical Medical and Friends Provident. Indeed, only Aegon Scottish Equitable and Scottish Widows are active in this space, with Axa having pulled back in April this year.
If there is consensus around how the commission landscape will look after the RDR for new schemes, considerable uncertainty remains around how the new rules will be applied to existing schemes.
If the regulator wants to move away from the current model, there is a distinct risk that any attempt to switch employers that have historically operated on a commission basis to fees will have the adverse effect of disengaging many firms that have bothered to provide for staff, with levelling down a big risk.
Suzi Lowther, head of corporate marketing at Hargreaves Lansdown, said that although she accepts that the current model is unsustainable, the ability to offer employers a range of payment options is key to ensuring that more firms actively take on board their pension responsibilities.
She said: “There is a bank of employers that have been able to deliver good pension schemes on a commission basis and without that they would not have been able to. If commission falls away completely, many companies would not be able to afford to provide pensions for their staff.”
Advice is expensive, Lowther added, particularly face-to-face advice with a full fact-find and the question is who will pay for it in the new regime. She said the RDR is underlining the importance of providing an ongoing level of service which can justify trail commission, for example, and the challenge for advisers is to prove they are delivering value for money.
The fact that trail commission looks set to continue in the brave new world suggests that in effect little will change except for the removal of indemnity payments. Adviser remuneration will really just be ren-amed albeit with increa-sed lip service paid to the need to actually earn it.
For many of the large employee benefits consultancies, the removal of ind-emnity commission argu- ably plays into their hands, with the likes of Towers Perrin already acting purely on a fee basis. That said, even the largest players will have to adapt their busin- ess models as a surprising number of the blue-chip EBCs still take some of their remuneration in the form of commission.
Rudi Smith, a senior consultant at Watson Wyatt, said: “With the nature of the clients that we have we are predominantly fee-based but with some products you cannot help but take commission. We offset that and rebate any excess and, come 2013, we will not work on a commission basis and that is great for us because we do not want to.”
Barnett Waddingham is also remunerated by a combination of fees and commission although it does not take indemnity commission and expects this model to continue in the post-RDR world. Hargreaves Lansdown, Bluefin, JLT Benefit Solutions and Willis Employee Benefits all operate on the same basis, reflecting the reticence of most employers to pay the industry for its services on a purely fee-only basis.
Different potential approaches to meeting any funding gap left by the removal of upfront commission are also being touted around.
Clive Grimley, a partner at Barnett Waddingham, said his firm may switch to charging on a time-cost basis as the RDR forces advisers to clearly demonstrate what they are doing to justify their remuneration. Similarly, Hames notes that the onus will be on intermediaries to detail what services they are providing and he says that by approaching insurers jointly with employers they could potentially negotiate more realistic fees.
Regardless of how creative the industry is at devising new payment structures, there will undoubtedly be a number of employers that decide personal accounts are a simpler solution.
Martin Ralph, pension & retirement benefits director at Willis Employee Benefits, said many of these companies are not the sort of firms that advisers would have been chasing anyway. However, the industry has to accept that a number of “good employers” will, in some instances through commercial necessity, be driven into the arms of personal accounts.
The challenge is on for advisers to hammer home to employers the advantages of offering their own scheme. In a shrinking market that has already seen Gissings taken over by Capita Hartshead and Towers Perrin merge with Watson Wyatt, many corporate advisers may find that building scale is an essential part of their survival plans in the post-RDR world.