One unintended consequence of the Government’s personal accounts’ agenda is the way in which the arrival of this new competitor in the low-cost pension market will push some IFAs away from fees and towards commission.
This may be an outcome that is contradictory to the broad thrust of the retail distribution review but the Department for Work and Pensions doubtless sees its project to compel employers to offer low-cost pensions as too important to worry itself with its influence on the FSA’s review.
Most advisers offering group pensions say they do not see the personal accounts target market as one they are at all interested in. It is true that most will be poor quality schemes with low take-up rates, small workforces and meagre incomes but Adair Turner’s original Pension Commission report in 2004 found that a considerable number of employers still had no pension provision at all. Even among firms with 250 staff or more, 40 per cent had no provision in place, a figure that I doubt has changed in the intervening three years.
Many of these will be in the notoriously high-turnover hotel and catering sector, identified by Turner as the worst pensioned set of employees in the entire economy, but there will be brighter spots for those advisers who are bothered to look, such as high-street solicitors, which also have a tradition of not offering pensions, as well as big retailers and manufacturers which do not have high staff turnover.
In my view, these firms will be worthwhile targets for IFAs that have a scaleable offering that can be easily tailored to the circumstances of particular employers. Obviously, many of those employers which have refused to set up any pension provision until now will take the path of least resistance and default into personal accounts but existing products on the market will be able to compete with the state version for some of these schemes at the very least. This is because the cost of personal accounts does not seem to be quite as low as Turner originally envisaged.
Last month, I quizzed pensions reform minister for Mike O’Brien on whether the annual management charge for personal accounts will be anywhere near the 0.3 per cent proposed by Turner. O’Brien said the charge will be somewhere in the range of 0.3 to 0.5 per cent for admin only, with fund management charges on top.
This makes me think that IFAs with very slick systems will be able to compete on price with stakeholder products starting at 0.7 per cent, at least for the bigger virgin group pension business.
For IFAs who are interested in these new companies – which, after all, will have to introduce a pension of one sort or another – there will be more weapons in their armoury than just competing on price.
The Government is so far down the line in the creation of the Personal Accounts Delivery Authority that a U-turn now seems unlikely but the relative political consensus that personal accounts have enjoyed could evaporate very quickly, particularly with the Tories scenting blood after their recent rebound in the polls. By 2012, personal accounts could be being portrayed as an interventionist reinvention of Old Labour principles, making them extremely unappetising to the entrepreneurs in charge of many of the companies in the target market.
I have already come across anecdotal evidence of employers which are aghast at the idea of admin and asset management run by a quasi-Governmental organisation.
The DWP estimates that around seven million people are expected to sign up to personal accounts. Advisers tuned into the opportunity will have a reason to go and talk to new companies for the first time. If they can get even a small proportion of the better parts of this new business, then there will be profitable times ahead.
But with personal accounts operating on a flat AMC basis, fees will be a non-starter for employers without a scheme. The irony is that while the FSA is trying to wean advisers off commission on pensions, competing with personal accounts will force them to take remuneration in this way.
John Greenwood is editor of Corporate Adviser