This year promises a grim outlook for pension advice – workplace pension reform, the RDR and the stumbling UK economy.
Depending on the size of an employer’s workforce, their obligations to notify their employees under the auto-enrolment reforms come into effect from September 1.
Starting a month later is a four-year programme in which employees will be automatically enrolled into their employer’s chosen pension scheme. Employers will have to make contributions, albeit initially only 1 per cent of relevant pay, but this makes advising an employee on their options more complex because one of the potential outcomes could be opting them out. Such advice is tightly regulated and scrutinised, can only be offered by appropriately qualified individuals and is likely therefore to be more expensive.
Then we bring in the RDR. Like the majority of financial advisers, BNH has been reviewing its proposition, identifying profitable and less profitable areas of advice and educating the clients we want to keep about the delights and perceived advantages of feebased advice.
We know from long experience that in the SME sector, few employers are enthusiastic about paying fees, preferring to share the cost of advice and overall pension provision with their employees in the form of commission.
Aside from senior employees who have access to independent financial advice as part of their remuneration package, employees, in my experience, will not pay fees for advice about joining their employer’s pension scheme.
What about commission for group pensions? Well, talking to product providers, commission goes completely for new schemes starting from October but remains for existing schemes “while commercially viable”, not something I would want to base my long-term business model on.
Anomalies abound. Some say new entrants to pre-existing schemes joining after January 1, 2013 can still generate commission while others say as each entrant to, say, a GPP or group stakeholder is a new individual contract, no commission should be payable after the RDR.
Another is that while commission goes on new group contract-based schemes, it is still payable on group trust based schemes such as Cimps and EPPs. Even if true, a sudden collapse in the GPP market in favour of Cimps might attract the attention of the FSA, swiftly followed by an adjustment of the rules.
Now we get to the point. An employee is thinking about retirement planning. Their employer does not offer any form of contributory pension but we know they will have to introduce one in the next few months or years, although we do not know whether it will settle on a basic Nest (or equivalent) or something better – they probably don’t know themselves.
Should the employee pay for advice now when they may be automatically enrolled into a scheme benefiting from an employer contribution in the near future? Or should they wait until they can access an arrangement with no advice costs and an employer contribution at some point in the future? Do the fees the employee will have to pay now outweigh the “cost of delay” of deferring starting contributions?
If they start an individual arrangement now, they have the option to pay for their advice through the contract, that is, commission, while deferring starting an arrangement until they know what their employer is doing about the reforms means that subsequent individual advice will then mean fees payable directly.
This is going to be a tough year economically. Employers and employees will want to hang on to their money and there will be a tremendous drive to minimise spending, particularly if the perceived solution may be coming along anyway.
David Brunning is managing director of Brunning Newman Houghton