Rival insurers are refusing to say how and when they will comply with the Government’s automatic enrolment active member discount ban after Friends Life confirmed it would reduce member charges to the lower active rate.
Under an AMD charge structure deferred members pay a higher fee than active members. Last month, pensions minister Steve Webb announced plans to outlaw AMDs from April 2016. In an interview with Money Marketing, Webb admitted active members of schemes that operate an AMD could see charges rise as a result.
He said: “If you have been subsidising the active members by the deferred members, there will be some equalisation once that is taken away.
“But because we have got Nest benchmarking at roughly 0.5 per cent, that will help stop that happening.”
Last week, Friends Life decided to scrap AMDs ahead of the ban and will allow current clients to shift to a single charge at the current active rate.
The changes are not retrospective, so people who have already switched employer will continue to pay the higher deferred charge.
Friends Life says active member charges will be subject to a minimum of 0.35 per cent, lowered to 0.3 per cent if a five-year commitment is agreed.
Rival providers have not yet taken a firm position on how they will address the ban.
A Scottish Widows spokesman says it stopped offering AMDs at the beginning of the year, and will be working with employers who had already opted for an AMD structure.
He adds: “We are currently determining the best means of helping employers re-shape existing arrangements and will communicate with them shortly.”
Aegon regulatory director Steven Cameron says: “We will be working with advisers to make sure employers comply with their immediate auto-enrolment duties and the new DWP requirements by the deadlines.
“As part of this, we will support a move away from AMD charging, and where viable retain the active price for the whole membership.”
Wingate Benefit Solutions corporate adviser Richard Grover says: “A lot of providers are focusing on the profitability of their schemes and where they cannot offer a lower annual management charge they are introducing employer charges.
“We could see this replicated in the AMD space, particularly for those with deferred charges above the 0.75 per cent charge cap.”
Adviser view: Robert Reid
One reason providers started offering AMDs was to pay a higher level of commission on the basis people would likely be in a scheme for a short period of time.
Although the provider might have been paying too much commission in the beginning, the higher level of charge for deferred members would even that out over the long-run.
Clearly if you suddenly go for the active level as your default then something has to give. So for schemes with AMDs set up pre-RDR, it seems logical the provider will stop paying commission because there is no resource to pay it from.
Any adviser that has schemes with AMDs needs to engage with the employer and the provider as a matter of urgency.
Robert Reid is managing director at Syndaxi Chartered Financial Planners
Active member discount ban at a glance: What providers are saying
Aegon – will “support a move away from AMD charging” and retain active price for the whole membership “where viable”.
Aviva – will update the market “in due course”.
Friends Life – has scrapped AMDs and will allow employers with AMD schemes to switch to the lower active charge.
Scottish Widows – scrapped AMDs at the beginning of the year and is working with employers to restructure existing arrangements.
Standard Life – will confirm its stance “in due course”.