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FARsighted flexi pay

In 1988, Winterthur Life, then Provident Life, launched its professional advisers&#39 division to offer commission-free pension products aimed at the high-net-worth individual.

The products did not have any commission loading and adopted a radical approach to charging. We believed that if we really were to offer commission-free pensions that they should also have clear and open charging.

Capital/initial units were a favourite method for collecting charges from clients in the early years. Few clients realised the potentially punitive effect of this method – particularly in early termination.

Clearly, this method of charging had no place in a clear and open pension product. Similarly, nil or significantly reduced allocation periods were, and often still are, used.

Another common ploy is to allocate over 100 per cent of premiums to a client&#39s policy but then take it away again in the guise of a bid/offer spread.

We decided to introduce a level allocation percentage and eliminate the bid/ offer spread by having single-priced funds. As the concept of the new pension was to give the public a portable and flexible product, we also dispensed with penalising clients for stopping and starting contributions.

However, this vision of the future was a little before its time. It was a radical departure from the way in which pensions had been sold and because the char-ges were so different that it was difficult to compare products accurately.

Many advisers had bec-ome used to receiving commission payments and, despite the evidence of the research, it became clear that the concept on commission-free pensions would take some time to become successful.

We decided that we had to find a way of remunerating those advisers who did not charge fees. However, we still firmly believed that the basic principles that we introduced were right and that we should not move back to offering commission-loaded products.

In 1989, we introduced flexible adviser remuneration, originally called fee compensation. The concept is extremely straightforward but at the time it was a radical innovation, in particular the funding of the “commission” to be paid to the adviser. In fact, this facility is still extremely rare today.

Flexible adviser remuneration allows the client and the adviser to discuss the amount, and how often, the adviser should be paid for giving the pension adv-ice. We are simply notified of the amount(s) agreed and we deduct this from the client&#39s pension fund and pay it to the adviser.

This means that the facility is totally flexible. As the fee is paid out of the client&#39s pension fund, the additional major benefit is that the payment is not liable for VAT. As long as the amounts are agreed at the outset, the remuneration can be either a level amount, a percentage of fund, a percentage of contribution or equivalent to the Lautro scale. This can be paid up front and/or on a renewal basis.

So what of the future – fees or commission? At one end, you have stakeholder and the pressures on administration. However, at the other end of the market we still believe that the future lies in a more tailored app-roach where fee charging will be appropriate.

There are many clients who need complex retirement planning advice for whom an off-the-shelf pension will not be appropriate. The introduction of Sipps and pension fund withdrawal further increased the options available to clients, thus making the choices even more difficult.

Meanwhile, there appears to be little prospect of major simplification in pensions legislation in the future. This, combined with the move towards professional bodies such as Institute of Financial Planning and Sofa, will help clients appreciate the value of the advice they are receiving, making it increasingly appropriate for fees to be charged.

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