Government and financial advisers join forces to steal your pension. It does not make for pleasant reading but it is not fanciful to suppose this could be a genuine newspaper headline three years from now if consultancy charging proceeds as envisaged.
The story would then go on to explain how “the Government is forcing low-earners to pay their entire pension contributions into the pockets of greedy financial advisers”. A left-lean-ing tabloid might go for a diff-erent angle, perhaps something along the lines of, Charges soar for low paid – low-earners pay five times more than their bosses.
Yes, group pension products that operate on a consultancy charging-type model already exist and individual pensions have been successfully offered on a financial adviser fee model for years. But auto-enrolment introduces a different dynamic to the equation. It is one thing for an employer to offer you a pension scheme where all or a significant proportion of your or your employer’s early contributions go towards paying the cost of advice. If you choose to join such a scheme because you think it looks like a good deal in the long term, then that is up to you. But if we have a situation where the Government forces you to put money into a pension scheme, even if you do have the chance to opt out, and the entire first year’s contributions go to an IFA, it seems to me that the industry is heading for trouble.
I wrote about consultancy charging and the FSA-facilitated working party that reported on the income rules in this column a month ago. I am revisiting the subject because more problems than solutions seem to be emerging as the industry digests the new framework.
How big is this problem? There is a school of thought that once the easy option of commission is removed, emp-loyers will be much more likely to talk about fees again. Further-more, there will not be that many genuinely new schemes written in the early years. And many intermediaries will take consul- tancy charging at lower rates than those cited above, usually out of employer contributions.
But if something is possible, then people will do it. And the worst examples of how consul-tancy charging is implemented will be the ones that make the papers.Most advisers I speak to see consultancy charging being done on a per head basis. That is fairest in the purest sense of relating charges to individuals for the work done for them. But such an approach also hits low- earners, who will be auto- matically enrolled into these schemes, hardest of all. Even a modest charge of £250 would take virtually the entire first year’s employer contribution of an employee on £14,000. A £500 charge would take the lion’s share of the individual’s contribution too if recouped in the first year.
Then there is the issue of whether high consultancy charges could make a scheme non-compliant for auto-enrol-ment purposes. My understand-ing is that the DWP and the FSA view is that they will not. This means you could end up with the perverse situation where employers want high consultancy charges well communicated to members because it makes their scheme less attractive, thus reducing pension costs to payroll.
Consultancy charges that discourage lower earners but not higher ones would even be attractive to providers who do not want to have to deal with thousands of small pots although that might be taking the example a bit far.
These problems do not mean consultancy charging is a comp-lete dead end but there will be bumps along the way and the industry should do all it can to make sure consultancy charging is delivered in a way that avoids the pitfalls. Sorry to focus on the negatives but I will not be the only journalist to do so.