The combination of the banning of consultancy charging and the OFT call to ban commission-based products will wreck many a strategy for auto enrolment, especially for cold storage schemes.
By cold storage I refer to those schemes set up pre-RDR on indemnity terms not just for the small number of initial members but with the expectation that full commission would be paid for those joining at the staging date.
It is likely these schemes will fail the auto enrolment suitability test leaving employers with the quandary of either setting up a new scheme for those not in the scheme at present or setting up a new scheme for all employees.
Just how do firms justify 5 per cent commission when your only fee is a 1 per cent AMC? I expect you are looking at long term application of charges but as many members leave in the first 5 years this was always as valid an approach as the legendary enhanced value accounting.
In addition to regard the AMC as the sole means of extracting charges is at best naïve. Comparing charges is never easy. When we need the profile of a pension plan’s charging structure we use the software solution which dominates this area – trying to do these calculations long hand is not just mad it is almost impossible.
It is little wonder that the Office of Fair Trading found issue with charging structures, especially active member discounts. After all the industry had highlighted the AMD’s potential for unfairness in the early days of the FSA scoping out consultancy charging.
Of course the FSA then passed the baton to The Pensions Regulator who sent it back and regrettably the FSA did not act on the feedback, research or recommendations until the RDR was upon us.
Many simply ignored all the warning signs and carried on and now find themselves in financial limbo. As the number of AE propositions grows I remain amazed at how unscientific the costs seem to be.
In one corner we have the low cost £1000 per scheme up to the firms charging a flat £20,000. It is clear the firms charging £1000 see auto enrolment as a cross selling door opener. What they might find is that opportunity is not as valuable as they have assumed.
Those making a significant charge will need to have clear detail of what they will do for their fees.I recently heard of one firm whose decision to charge £20,000 was based on selling 10 schemes and that firm needing a £200k gap in production in other areas filled. Nothing wrong with the arithmetic but I cannot see how they will link activity to costs.
The publicity that this report will get means all advisers will face clients asking questions and employers too will receive approaches from employees keen to determine if their scheme is good value or otherwise.
There are many schemes with poor charging structures, both in terms of group personal pension plans and defined contribution schemes, that will come under the spotlight so the opportunity for well organised firms to assist will increase. If, however, keeping multiple plates in the air are not your skillset then step away from the area.
Rob Reid is managing director of Syndaxi Chartered Financial Planners