As a youngster, I was always keen to avoid the overuse of adjectives. People who stated that everything was fabulous or great were going to find themselves stuck for words when a really major event occurred.
The major event this year is the retail distribution review coming in and some are going to be rendered speechless. I say this for a variety of reasons, from the noise over legacy pension charges to the problems that automatic enrolment will bring.
Consultancy charges are still not secure, despite the recent reassurances from HM Revenue & Customs. In the world of treating customers fairly, how can it be fair to deduct the cost of advice for the employer or non-joining colleagues?
The argument that it would penalise the employers is ridiculous. The DWP needs to consider better ways of encouraging employers to pay for advice.They could consider the idea of ‘no education, no corporation tax relief on contributions from the employer’ – radical but well overdue. Those who continue to defend ‘commission without permission’, and in many cases do not even meet the members, really need to think again. The move to level commission by the benefit consultants has led us to the cul-de-sac where the fees option is the only real way out.
We moved our group personal pensions to fees four to five years ago and have not looked back. Showing the costs and revenue made the discussions with our clients simple and made me wonder why we had not done it earlier.
Now let’s move onto charges in general. My fellow columnist Nic Cicutti has hit the nail on the head by focusing on the scandal of loyalty bonuses and additional charges that kick in when premiums cease. This is not restricted to private pensions and some of the ongoing deductions are just as severe with defined contribution schemes.
While we are focusing on costs, I also noted a comment in last week’s issue that there was too much focus on the impact of turnover in a fund’s investment. I have seen stats where the turnover has ranged from 40 to 400 per cent. It is true that at the lower end – 40 per cent – turnover is not as relevant as the total expense ratio. However, at the opposite end of the scale, no amount of volatility can excuse this.
The focus may be on pensions for now but when the attention turns to all investment charges, heads will roll and charges will fall. As the revenue for fund managers reduces, so will their influence in the distribution arena. Many have yet to wake up to this but they need to soon, if they are not to lose all influence.
Back to pensions, minister Steve Webb needs to understand that the IT systems used to run legacy pension products are inflexible and are preventing a change of charging structure. The only way is to reverse the charges once deducted. However, the complexity of some structures are such that the cost of doing so will outweigh the rebates. Why did these pension plans need such complexity in their structure? It was not just about commission but was about embedded value, the system of booking profit before it had actually been earned.
The phrase ‘it’s not fair’ is regularly shouted by those who have contributed to their own predicament. These charging structures helped to pay commissions as well as the expenses of the provider. As Nic’s column amply demonstrated, history can be revealing and shaming at once. Let’s just make sure it is not repeated.
Robert Reid is managing director of Syndaxi Chartered Financial Planners