For those who argue the FSA is right to subject the group pension sector to consultancy charging, I have one question – do you accept it will result in fewer Britons being offered workplace pensions paying a contribution higher than the the National Employment Savings Trust minimum?
If the answer is no, then I and, no doubt, the providers who are expecting a fall in distribution, would be interested to see the evidence to back up such a view. If the answer is yes, then surely consultancy charging risks exacerbating the market failure that Lord Turner wanted to address.
Before charging is adopted, there must be research into whether such a policy creates more losers than winners. We need to know if the benefits consultancy charging creates for those actually in schemes set up on such a basis, for example, in terms of lower charges, outweigh the losses suffered by lower employer contributions received by those who end up in Nest who might otherwise have been getting more than
just 3 per cent of band earnings.
The reality is that some employers not prepared to pay a fee will be put off consultancy charging because it will look unattractive to members.
Furthermore, we also need to find out how much more likely it is that staff will opt out where employers do go down the combined charge route.
This toss-up between a mono-charge structure and a combination of up front and level is the dilemma facing the DWP when it comes to Nest.
When the Personal Accounts Delivery Authority researched the issue back in 2008, it found that up-front charges do not go down well with employers or staff, even though a level annual management cost ends up more expensive. It concluded savings outcomes would be worse under a combined charge.
The Department for Work and Pensions will reveal shortly what the charging structure for Nest will look like and everyone I speak to says it will be a level AMC. That is because Nest is terrified of members having less money in their pension 12 months after joining.
That same reasoning is precisely why Nest’s investment strategy in the early years will be extremely cautious, and rightly so. For a body charged with increasing the nation’s pension savings, it does not want people opting out in the early years.
Meanwhile, back in the poor old private sector, the retail distribution review says today’s workplace pensions are unfit for employers wanting to set up schemes from 2013 onwards unless they are prepared to write a cheque for a fee.
Yet the more I hear about consultancy charging, the more unworkable it sounds. Nest is running scared at the idea of a 5 per cent contribution charge plus a 0.5 per cent AMC. Yet under consultancy charging, members will be asked to lose perhaps 25 or even 50 per cent of their first year’s contributions to pay a consultant to put their employer’s scheme in place.
However hard you try and tell people the charging structure could work out cheaper over the lifetime of the product, this will come across as just another example of the financial services industry lining its pockets.
Although I am editor of Corporate Adviser, I have no real interest in how GPP salespeople get paid, despite comments on the Money Marketing website to the contrary. But as someone who regularly writes the consumer angle on pension stories in national newspapers, I can guarantee that a product which takes half an employee’s first-year contributions and gives it to an adviser, is not destined for good press.
As Steve Bee recently pointed out, we are going to be setting up a million new pension schemes between now and 2017. I have no view either way as to how much commission advisers get for setting them up new schemes. The only outcome of any importance to me is that those schemes should contribute as much as possible into UK workers’ pensions.
John Greenwood is editor of Corporate Adviser