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High loaders defend commission position

Leading pension providers have condemned rival life offices that still pay hefty initial commission on group personal pensions, claiming it is unprofitable and unsustainable.

Friends Provident’s recent decision to stop paying initial commission on new group personal pension business has left Norwich Union, Aegon, Axa and Scottish Widows as the only providers paying initial commission in the market.

Scottish Life head of communications Alasdair Buchanan says their business model is “crazy” and claims that poor persistency means they are making huge losses.

He says: “The business does not last anywhere like long enough and half of cases go off the books in four or five years.”

Skandia head of pensions marketing Nick Bladen says: “I am slightly astounded that Friends Provident had been able to hold on so long. The market will move to customer-agreed remuneration so life offices which have not already done so need to start embracing this. Those that cannot adaptare going to be big losers.”

Standard Life head of pensions policy John Lawson says: “Friends Provident coming out of this must scare the other providers because they will be getting a higher share of an unprofitable market.”

Scottish Widows and Norwich Union say they have no plans to stop paying initial commission.

Aegon says change is needed but it will be driven by the retail distribution review and the introduction of personal accounts.

Norwich Union head of pensions Iain Oliver says: “It is only financially viable if you have got the right level of rigour underwriting the schemes and we have that.”

In other news, Living Time says its retirement product has been designed with the retail distribution review in mind and could be sold under primary advice if the proposals are implemented.

The product is an investment within a drawdown plan which provides guaranteed income payments for a set number of years or until the client reaches the age of 75, after which the guaranteed maturity payout can be used to buy a drawdown or annuity plan.

Chief executive Kim Lerche-Thomsen says: “Our products have been designed to fall under primary advice and are very straightforward. Full-fat drawdown products could not possibly come under primary advice because they are far too complicated but ours could.”

But Informed Choice joint managing director Nick Bamford says: “I do not think at-retirement products will be in the realm of primary advice. It is stretching the imagination too far. I am concerned about the process leading up to the execution of the product sale because at-retirement products are complicated and there are lots of options to choose from. Primary advisers probably will not be able to provide that level of detailed advice.”

And finally, with-profits firms have been blasted for not going far enough in their governance and failing to have enough independent people on their committees.

AKG Actuaries and Consultants names Scottish Widows, Royal Liver, LV= and Wesleyan Assurance as firms that have with-profits committees made up of non-executive directors, executive directors and even a former managing director, in the case of Wesleyan.

AKG communications director Guy Vanner says: “Some companies have a surprising interpretation of independence. Companies are starting to do more but could easily go a bit further and we would like to see adoption of best practice.”

In its conduct of business rules, the FSA states with-profits governance arrangements should involve some independent judgement in the assessment of compliance with the principles and practices of financial management.

This can be provided in different ways, including establishing a committee, but the FSA does not state that members should all be independent of the board.

In a Dear CEO letter in September last year, the FSA said: “We found examples of the potential for conflicts of interest, where either the independent reviewers are also involved in other work with the firm or where some or all WPC members are executives of the firm.”

A spokesman for the Aviva policyholder advocate office says: ³Governance is vital and we believe that committees should comprise entirely of independent members.”

A Scottish Widows spokesman says: “Our aim is to strike a balance between independence on the one hand and board responsibility on the other. Boards of companies are responsible for the operation of the business.”

An LV= spokeswoman says: “We think that how we operate stands up and can be seen through our performance. As we are a mutual, our members are at the heart of everything we do.”

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