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Head to head: Group dynamics

Does upfront commission damage the group pension market?

James Ward: Director of UK corporate Friends Provident
James Ward: Director of UK corporate Friends Provident

It goes without saying that the current commission market is broken and desperately needs fixing. With inexplicably long payback periods, high upfront commission is simply not sustainable for providers and with only three serious players remaining in this game the market cannot and will not operate effectively.

I don’t believe commission serves customers’ or advisers’ best interests either. All too often, the question posed by advisers is “this is the AMC we want, now, how much commission can you give me?”, when it should be “this is the remuneration I have agreed with my client, now what price can you offer my client?”

This means that providers compete on commission levels, not on the quality of their service- which can’t be good for customers.

The commission model also makes it difficult for advisers to generate long-term value in their business. Doubtless, it can generate lots of short-term cash but it leads to a business model that depends on generating new sales every month rather than striving for ongoing revenue from The fee-based market works well, prompting competition bet-ween providers and between advisers. But fees won’t work for everyoneexisting clients.

You could argue that the problem is not commission itself but rather providers competing on the basis of commission, which could be avoided by fixing industry standard commission rates. This would eliminate some of the potential for commission bias but it does not fix the financial dynamics.

The fee-based market works well, prompting competition between providers and between advisers. But fees won’t work for everyone

Given that all previous attempts to address this have failed, we need a more fundamental solution such as fee-based advice or consultancy charging (as proposed by the FSA).

The fee-based market works well today, prompting aggressive competition between providers (based on proposition quality and price), and between advisers (based on service quality and price). But we know that fees won’t work for everyone.

Consultancy charging enables advice charges to be “bundled” into the product charge but in a way that is transparent and does not lead to commission-driven bias. Advisers can choose to take their remuneration over time (for example, fund-based, as an add-on to the AMC) or as premiums are received (with a corresponding deduction from employer or employee contributions).

Factoring by third parties (not providers) can help advisers to convert ongoing revenue to upfront payments if they need these.

I see absolutely no reason why consultancy charging can’t work. There are those who will say the employer and member won’t like charges on premiums – but the member is already paying for the adviser’s charges, just in a completely non-transparent way.

Making the charges more explicit is fundamental to building a proper competitive market based on quality and price.

John Greenwood: Editor, Corporate Adviser
John Greenwood: Editor, Corporate Adviser

Nobody would deny that there are unsustainable levels of commission in the GPP market, with some IFAs taking commission on group pensions that bears no relation to the amount of work they are doing. And yes, ultimately, this money comes from somewhere within the pension system that consumers ultimately pay for. But does banning commission in favour of consultancy charging make the situation better or worse for the workforces of this country? Whether consultancy charging will be good for you as an employee depends on which of three groups your employer falls into. For those employers who accept fees, then employees will doubtless get better outcomes through lower charges over their saving lifetime. For those employers who are persuaded that consultancy charging is the way to go, there will be some winners and some losers. Those who stay for a long time will probably be better off. Those Whether cons-ultancy char-ging will be good for you as an employee dep-ends on which of three groups your employer falls intowho leave early will probably not. Those who quit the scheme because they don’t like the upfront charges will definitely not.

With the average employee staying around six years, the FSA needs to find out how many of each there will be. But it can’t at present because it does not know what consultancy charging levels will be set or what active member discounts will be put in place.

For staff of that third group of employers who decide consultancy charging is either too complicated, too unappealing or too expensive, Nest beckons. Those people unlucky enough to work for such employers will get 3 per cent of band earnings from their employer. Some, but not all, might have got 3 or more per cent of all earnings had consultancy charging not been put in place.

Whether consultancy charging will be good for you as an employee depends on which of three groups your employer falls into

The truth is, we do not know how many people there are in each of these three groups and the FSA does not give the impression that it is trying to find out. One thing you can be sure of though is that those employees in the latter group, on perhaps half the contributions they might have otherwise got, will be disadvantaged to a far greater extend than everybody else.

As with all regulatory changes, there are winners and losers. The regulator should not just ask itself whether its proposals will do more good than bad for these groups overall – it should carry out the research needed to make an informed decision on the subject.

If your group pension is charging 1.5 per cent, falling to 1 per cent a year, you are undoubtedly going to lose a lot through charges. But I speak to lots of good advisers currently operating on a commission basis who are taking considerably less than that and delivering AMCs around half the stake- holder cap. Maybe the stakeholder cap is at the wrong level for the group market.

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