It really is the end of the world as we know it, for formerly commission-based advisers at least.
The Office of Fair Trading’s report into defined contribution pensions has delivered a damning indictment on certain parts of the industry and its recommendations on commission will have far-reaching ramifications for the corporate advice sector.
The OFT’s report has driven a coach and horses through the plans of many corporate IFAs who had thought they had sorted out their transition from RDR to fees and were gearing themselves up for auto-enrolment.
For them the message remains the same – an urgent need to retool their business to become auto-enrolment implementers, including a switch to deriving non-regulated income from white-labelling software to employers. But the urgency of making that change is now amplified several times over.
There is no point advisers deluding themselves. There is a real chance that all commission on group pensions, not just new joiners and increments, will be turned off in the coming months.
This would be a complete U-turn on the FSA’s earlier proclamation that commission on schemes set up before the RDR could continue. But the OFT has got the bit between its teeth and recent statements from the Department for Work and Pensions point to more intervention rather than less.
Some experts predict the tap could be turned off by next April. If that is the case, we can expect a rapid shakedown and some firms will probably go to the wall.
The argument that such a move would make no sense at a time when the country has such a high need for pensions advice will hold no sway. With tens of thousands of firms staging next year, the impact that the loss of a few small corporate IFAs would have had would be minimal from the DWP’s perspective. And the minister would be correct in arguing that the professionals involved would soon move to other organisations that were not set up on a fee basis, so expertise would not be lost.
The OFT’s recommendations leave many questions and it will be several months before we know how far a commission ban will go. Untangling all that has been put in place will be a massive task. The big question will be who will benefit from the ending of commission, providers or consumers?
Take the scheme in my workplace. It was rebroked recently to a 0.3 per cent active member charge, rising to 0.7 per cent for former employees. Previously the scheme had been 0.5 per cent across the board. Will the scheme revert to 0.5 per cent for all, in which case my employer has got to go through a process of communicating the increase in charges to the workforce. Who will pay for overseeing the change? And what happens to the money the life office would have paid in trail and on future increments?
Presumably this will just be kept by the insurer. It has been suggested that life offices will have to cut their prices to remain competitive and avoid schemes being rebroked, but with so much else going on with auto-enrolment, I won’t be holding my breath.
There are many ironies and paradoxes in the OFT’s recommendations, which to be fair reflect the paradoxes in the group pensions space. My employer’s active member discount of 0.7 per cent is not OK, while a legacy scheme of 1 per cent is OK. So is a 1 per cent charge for anyone in Nest for the last five years of their working life or a trust-based scheme with a monthly administration charge for departing members.
And while I can enjoy a 0.3 per cent charge as an active member, this scheme is not acceptable to the OFT because my employer’s adviser has no incentive to shop around for a better deal.
The OFT has effectively laid an RDR Mark II onto the industry. Its recommendations will doubtless lead to better outcomes for savers over the long run. But given the capacity crunch facing the industry in the coming months, surely all this should have been done years ago. As it is, it looks like we are in for a second successive Christmas wondering how the industry is meant to operate.
John Greenwood is editor of Corporate Adviser