In many ways, the existing charging model in the group pension market offers the ideal combination of choice and simplicity to advisers, employers and employees. Through fees and a variety of commission shapes, the market offers solutions for a range of adviser business models and allows employers to pay for advice in a way that suits them.
Employees also benefit through a simple charge structure that is easy to understand and compare and does not cause detriment to those that regularly move job.
So, what is wrong with the current model? One issue is that the payment of initial commission is capital-intensive and exposes providers to persistency risk. The other main issue is that the cost of commission is not transparent and this can cause commission bias in the market.
Consultancy charging, as proposed by the FSA, can resolve both these issues but it could potentially undermine those features that currently serve the market so well.
In particular, it introduces an additional layer of complexity that could be difficult to explain to employees, which may reduce take-up rates. Also, employees could suffer detriment if they regularly move job.
Providers can build consultancy charging structures to fit most advice models and this works particularly well for individual employee advice models. However, it is more difficult to construct an appropriate model to pay for employer advice, especially when most of this is incurred at the scheme set-up stage.
In the absence of factoring, there is no way that consultancy charging can fund an upfront employer advice payment without taking most of an employee’s first year’s payments – which will inevitably discourage pension saving.
It also means that those employed at the scheme set-up stage would bear an unfair charge burden compared with those joining at a later date, after the initial advice had been paid for. Employers will still, of course, be able to pay for pay for advice with fees. But the ability to pay for advice through the product is an attractive feature to many employers.
If consultancy charging decreases employer access to advice, it risks reducing employer engagement in pension saving. This risk is increased by Nest at the same time as consultancy charging as with reduced access to advice many employers may simply opt for Nest with minimum contribution levels – which could result in levelling down and reduced pension saving.
The Government and the pension industry both have an objective to increase pensions saving but, without sufficient thought, the move to consultancy charging could be detrimental to this. One action to help would be for the FSA to allow some form of factoring. However, the industry also needs to ensure that it builds consultancy charging models that meet the needs of all the stakeholders as effectively as they are met by the current model.