Rules and feedback statements coming out of the DWP and FSA in the next few weeks will determine the fate of contract-based pensions as the dominant force in new pensions business in the UK. With the industry on tenterhooks for two regulatory announcements, speculation is growing that trust-based schemes could be in for a renaissance, although not for the reasons that its advocates would want.
Some contract-based arrangements have been criticised for failing to offer the governance of their occupational counterparts. Now the potential ability to sidestep employer contributions and the Retail Distribution Review could give occupational plans a massive boost, and allow life offices to continue paying indemnity commission. Legal & General says it is monitoring the space that Xafinity has positioned
itself in with its recent launch of its Xafinity Pensions Trust offering. Standard Life, Aegon, Aviva and Scottish Widows also say they will enter the space if the regulatory framework makes it appealing to do so.
Whether occupational DC is to get a shot in the arm depends to a large extent on whether or not the Government moves to close down the facility for employers to refund contributions to staff leaving in the first two years. Providers are looking hard at what old arrangements they have in the cupboard that they can dust off, give a lick of paint and put out to the market. Andrew Tully, head of pension policy at Standard Life, says: “Trust-based is something we are looking at. We have had our Stanplan since the mid-1970s. We would need to revisit it but the fact we already have it set up means we have less work to do.”
Standard is yet to decide whether a commission-friendly future for occupational will bring it back to up front payments. “We have not made a call on what the RDR means in terms of commission, but it is true that going down the occupational route could make initial commission viable again. But it does seem silly that you can just sidestep the rules in this way,” says Tully.
However, he thinks in principle it makes no sense for the landscape to be so uneven. “The FSA have an issue that if an individual ends up paying charges they should understand what they are paying for. But you have to question how much new business there would be. Do individuals benefit from the restructuring of schemes?” he says.
Scottish Widows is another provider which already has a trustbased DC operation that it could tailor to the new environment. Ann Flynn, head of scheme acceptance at Scottish Widows, says: “We have been actively looking at a trust offering in light of the employer refunds allowed and the fact that it is excluded from the RDR. We are already revamping our offering for existing clients, with features such as better web services and we are looking at how this could be further tailored. But it is not about sidestepping the RDR –how to do that is not on the agenda for us.”
She says: “We will not know until we get more details. If it stays as it is, it will skew the market. We are anticipating a response in a couple of weeks. Aviva is actively monitoring the situation, and says it could be offering up front commission post-2012 if things are not changed. Aviva pensions spokesman Edmund Downes says: “The DWP is aware that the refund of contributions is a discrepancy but they cannot give any guarantees that it will not be changed. We say the differences between the two regulatory frameworks should be minimised. On all
other issues except this they are. You might think, from an IFA point of view, it might be easier to sell a trust-based arrangement, not just because of the commission. It is then fortuitous that they can get commission on an occupational scheme. Occupational schemes are outside the FSA’s remit so we do not think that they can stop IFAs accepting commission.”
Downes believes the FSA may face a problem so intractable that it can only be resolved by primary legislation, something Government will not have the stomach for at this time. But he says there are alternative approaches the FSA could take to stop a mass trend back to occupational DC.
“There are two things they can do. Firstly they could remove GPPs from the scope of the RDR. We think that is unlikely. Every individual personal pension would become a GPP, because as currently drafted, there is no distinction between a GPP and a personal pension.
“The second option is to forbid providers from paying commission on occupational schemes going forward. They could argue that providers are encouraging behaviour that is causing a detriment to customers, or accuse us of disrupting the market. The only people likely to pay indemnity commission are insurance companies and they are regulated by the FSA.”
Downes is realistic about whether Aviva would pay indemnity commission through occupational schemes post-RDR. “If we didn’t and other people did we would lose out.”
If such a situation comes to pass then providers’ war of attrition on commission would continue as though the RDR had never even happened.