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Pressing charges

John Greenwood argues that consultancy fees risk exacerbating the pension problem.

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


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. As chuffed as I am that Greenwood feels the need to respond to my previous taunts (he even drops the pretence of calling GPP salesmen “IFAs”), its clear that he still doesn’t get it.

    “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.”

    Well absolutely. And that’s the surprise!

    Whilst there is a lot wrong with RDR, what Consultancy Charging will do is make remuneration of these GPP salesmen transparent. And so difficult.

    If they want to earn huge levels of upfront commission, they will have to justify it. And of course, if all they’re doing is getting their mate from Scot Eq or Scot Life to do a few presentations for them and print a load of packs, it’s going to be difficult to bag £25k for a few lucky hours worth of work. Especially if they took the same again the last time they rolled-the scheme 2 years ago.

    The reason the Existing Providers are forecasting reduced volumes is because there is currently a very small handful of players. Nobody else has the resources to plough into a GPP market that requires huge upfronts just for the business to shift 25 years before they can break-even on it.

    This oligopoly is going to be busted open by smashing the existing commission arrangements (when FSA actually get around to doing it).

    Likewise, genuine advisers in this market might eventually be able to make a reasonable living if they focus on ongoing servicing of schemes, intelligent asset allocation and work-place advice in consolidating other pensions.

    No. The real RDR issue is how it will put proper individual independent advice out of reach – through a factoring ban and prescriptive qualification requirements. All that ‘consultancy charging’ will harm will be the living of those GPP salesmen.

    Who knows, maybe the trade rags they read will have to up their game when they start addressing more discerning readers?

  2. I see the Man in Black is still on something.

    John, can we have an answer on your last article? You said that somebody like me who just advises employers on GPPs would have to take the Diploma. Whilst I agree that the Diploma is totally pointless, the Man in Black had clearly been reading the rulebook more than you.

    According to Man in Black, you were wrong on this exams thing. Advice to employers on GPPs isn’t regulated. Which is why I don’t have to be FSA authorised. Hence surely I don’t have to do all the exams that you said I did? Can you answer that please?

  3. I see from the addition of the 18th February that John Greenwood is persisting in trying to defend the indefensible. Indeed I wonder if he actually lives on Nick Cicutti’s Fantasy Island!

    What he doesn’t address is a very simple first question. Why wouldn’t an employer wish to pay a fee? I think this would be very illuminating. Why should it even be deducted from premiums? Bear in mind that the employer can obtain corporation tax relief from the charge. Then of course he misses a fundamental point. An employer who provides a Pension does it not as an entitlement but as a privilege. Whatever the reasons for work place Pensions in the past, we are now in the 21st Century and perhaps one could even argue that there shouldn’t be such a thing because individuals are abrogating their own responsibility for looking after themselves.

    Be that as it may, it is recognised that some employers wish to provide Pensions as an additional inducement and advantage to staff, not only out of the goodness of their hearts but for commercial advantage. Although, yet again in the modern world, attracting staff is not really a problem as there is plenty to be had. So we begin to wonder whether a lot of this hand wringing is for the advantage of those who operate within the corporate pension market rather than those who may possibly benefit from those pensions.

    Let us now look at some more detail. He maintains that employers in the group market contribute more than the minimum required by NEST. UK average earnings are presently around £23,000 so if people are going to contribute at better than nest rates, let us assume 10% – that’s £189 a month or £2,267 a year. Let us now presume that the average number of employees within a GPP is 10 (which is probably being very generous to Mr Greenwood as the average is probably higher than this). That is therefore £22,672 in premiums per annum. If he thinks that £6,000 to about £11,000 is fair charging for a scheme of this size then he is definitely on Nick’s Fantasy Island.

    As far as ongoing work is concerned, how much work has the adviser got to do? Most of it is run through the internet directly with the provider. A 10 man group personal pension probably involves about £2,500-£3,000 worth of set up work. If it is more than that one has to ask on what basis? Even if the premiums are twice that much it doesn’t mean there is twice as much work. As far as servicing is concerned, we all know that ongoing servicing is a joke.

    I am sorry I just don’t buy in to Mr Greenwood’s tale of woe. It isn’t good enough to pile it high and sell it cheap so that everybody thinks they are going to get a jolly good pension only to find after a few years they have ashes. Indeed I am not even convinced that a group plan is the best way to go in any case, as for the majority it does not encourage participation and for those that are interested it doesn’t provide enough scope.

    In conclusion I believe it is entirely right that charges and costs are transparent and that indeed these charges and costs are not taken out of contributions that should rightly be the members. It is entirely right that if you are going to set up a scheme like this the firm pays for it on top. You may well argue that this leads to a smaller premium, but at least then the member knows how much exactly is being funded into his own pension and may make further arrangements themselves, but at least nobody is under any illusion about what is going in.

    I would suggest Mr Greenwood you go back to your drawing board!

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