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The shape of things to come

With lawmakers currently making key decisions on auto-enrolment, personal accounts and the Retail Distribution Review, shaping the regulatory environment has never been more important. James Phillipps reports


As 2012 looms ever larger on the radar, there is a growing recognition within the industry that it has to act fast if it is to influence the future regulatory landscape.

With auto-enrolment, personal accounts and the retail distribution review all set to be implemented that year, the stakes are certainly high for both corporate advisers and product providers.

One of the major problems is around the lack of continuity at government level and knowing just who the industry should lobby to ensure that its voice is heard.

Prime Minister Gordon Brown’s June Cabinet reshuffle saw the appointment of a new pensions minister in Angela Eagle and, above her, Yvette Cooper named as the new secretary of state for work and pensions. Cooper became the fourth minister to fill that role since the introduction of the RDR and the seventh since A-Day. On top of that, both are new to the pensions brief, raising concerns that they see the planned reforms as a done deal and are less inclined to listen to the concerns of the industry.

“We all joke about the fact that there have been 20 pensions ministers in the last week or month but it is very difficult,” said Clive Grimley, a partner at Barnett Waddingham. “How are we going to influence when we do not know who to influence, notwithstanding any change of government.”

With the next general election set to be called by June 3, 2010 at the latest and few predicting anything other than a Conservative victory, many practitioners have effectively foregone directly lobbying the incumbent government in favour of instead seeking to influence mandarins within the DWP.

Paul Goodwin, head of pensions marketing at Aviva, said: “It is difficult with the government when you have such a revolving door so we have been communicating with senior civil servants and we will also be running some fringe events at the party conferences.”

Goodwin said another issue hindering effective engagement with both the Government and the regulatory bodies is the fact that the industry lacks a coherent, single voice.

The divisions on commission, for example, run deep within both the provider and adviser communities while a whole slew of employee benefits consultants that will undoubtedly have a major bearing on the implementation of any new pensions landscape are not regulated and nor are they represented by any trade body.

Clearly, with so much at stake, there is an inevitability that vested interests are going to come to the fore and Goodwin’s main concern is that any concerted effort by the industry to influence change will be dismissed out of hand for this reason.

To get round this, Aviva is looking to broaden the debate by lobbying in partnership with the major representatives of industry as a whole.

“We are trying to go in with employer groups, which we believe will put is in a much stronger position. We are in discussions with the Confederation of British Industry and the Federation of Small Businesses,” Goodwin said. “They are not fully on board yet and we feel that we have only got until Christmas to shape this.”

Although bringing the wider business community into the discussion is a shrewd move, there remains a significant danger that no matter how effective the industry is in lobbying over the latest round of consultations, whatever is put in place by the curr- ent government will be either ripped up or altered beyond recognition by any incoming Conservative administration.

David Bird, a principal in Towers Perrin’s retirement practice, noted that the recent volley of mixed messages from the Tory hierarchy has done little to alleviate industry concerns about a lack of consensus in Whitehall. “A couple of weeks ago, Theresa May [shadow secretary of state for work and pensions] gave a heavy hint in a speech to the CBI that the Conservatives would have auto-enrolment but not personal accounts,” he said. “A week later, Nigel Waterson [shadow pensions minister] said they would keep personal accounts, but in a ’potentially modified format’.”

Adding a further layer of confusion, Theresa May has also said that she will review the Personal Accounts Delivery Authority while shadow Chancellor George Osbourne has outlined plans to scrap the Financial Services Authority.

Although ditching the FSA may be regarded as something of an extreme step, there is certainly an industry consensus around the fact that the current regulation of pensions, with the FSA overseeing contract-based schemes and The Pensions Regulator governing trust-based arrangements, causes confusion.

“The problem is the FSA regulates products sold into pensions and there is clearly an overlap when it comes to contract-based schemes,” said Duncan Howorth, managing director of JLT Benefit Solutions.

This has been exacerbated by the FSA saying in the latest RDR consultation paper that it was concerned about the possibility that personal accounts may drive employers down the occupational pen- sion route while since then TPR has vowed to keep a closer watching brief on defined contribution schemes.

“There is a turf war going on between TPR and the FSA,” said Grimley. “Eighteen months ago, they said they were going to develop a joined-up approach to workplace pensions and it has not happened. This has got to stop.”

Whether a large number of employers choose to go down the trust-based scheme route as an alternative to personal accounts and a means to escape FSA regulation remains to be seen. However, it has been widely flagged by the industry that the fact that occupational schemes do not come under the RDR is anomalous, particularly when the rest of the financial services landscape is facing such a rad- ical overhaul.

Irrespective of the RDR, employers moving to a trust-based arrangement will still have to be able to show that the scheme is as good as or better than personal accounts come 2012.

The requirements for qualifying schemes are expected to be published in autumn and this is leading many corporate advisers to question whether these will include echoes of the stakeholder regime, particularly around the benchmarking of charges.

“Will there be another RU64?” asked Howorth. “The level of service on qualifying schemes will be a lot fatter than personal accounts and so the charges will be higher.”

The issue of the level of service members receive clearly throws up a few grey areas. Although the FSA accepts that the majority of members in workplace pensions do not receive face-to-face advice, many practitioners are concerned that conversations they have around pensions with employees at worksite presentations could be construed as personal recommendations.

Robin Hames, head of technical, marketing and research at Bluefin, pointed out: “In reality, the IFA is giving people advice on joining often just through a quick conversation asking them if they can afford to contribute and whether they are cautious or balanced in their attitude to risk. This is not really advice though if you look at the RDR.”

Grimley agreed, noting that it is very common for individuals at worksite presentations to approach the adviser with questions at the end of the session. “Usually they just want basic reassurance and it goes down incredibly well, but is it still advice,” he added.

With auto-enrolment set to result in a vast increase in the numbers of employees coming into workplace pensions, many of whom will have no knowledge or understanding of the need to save for their retirement, the need for advice is going to grow exponentially, which risks further blurring the lines between individual advice and guidance.

“It is a huge issue and the question is how we meet that need and how we meet the cost,” said Rudi Smith, a senior consultant at Watson Wyatt.

Howorth believes a rethink is needed of what constitutes advice and what constitutes providing information. He said that too much of the FSA’s require- ments centre on the product rather than on more holistic areas, such as understanding risk and the fact that pensions are long-term investment vehicles.

“The focus has always been on disclosure and not information. It is more about meeting the rules of the FSA by telling people what something costs rather than explaining that this fund may go down 25-30 per cent in any given year,” he said.

Clearly, education is going to be at the forefront of auto-enrolment and the personal accounts regime but who will provide at and who will meet that cost remains to be seen. Corporate advisers undoubtedly have a crucial role to play in this but they would be wise to ensure that their voice is heard in the RDR and personal accounts consultations for the good of both themselves and consumers.


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