Untangling decades of complex charging structures was never going to be easy. But few outside the industry would think it would take perhaps a year and a half to achieve, particularly given the demand for clarity against the backdrop of auto-enrolment.
Yet we are unlikely to hear back from the urgent audit of legacy systems until before the end of 2014 at the earliest. It is a timetable that creates all sorts of complexities for regulators in taking forward the other recommendations of the Office of Fair Trading’s landmark report into workplace pensions.
The OFT’s recommendation that the DWP consult on abolishing active member discounts and commission is expected to be taken forward by the minister this autumn. Yet if ABI members are being given until the end of next year to deliver a detailed account of all the charging structures buried within legacy schemes, providers may find themselves having to review their back book twice – once to remove commission and active member discounts if the DWP comes to a speedy decision on the issues, and then again to deal with the broader challenge of high charges.
The terms of reference of the audit of ABI providers’ pensions back books are not likely to be set until the end of 2013. We then have another year of investigation before we know what will happen to those existing legacy workplace schemes, although the mood music is that it will be good for consumers.
Aegon head of business regulation Steven Cameron says: “The OFT wants a proper and consistent analysis across the industry of all costs and structures – initial charges, policy fees, loyalty bonuses, fund charge rebates – to understand what is there.
“Findings will be presented, framed in the value for money principles that have been set. These will be given to the new independent governance committees who will make recommendations back and improvements to schemes will be made.”
Whether this timetable for improvement of charges overall will calm the reforming fervour of the DWP in its autumn consultation, by deferring any decision on commission until the end of that audit process, remains to be seen.
For Cameron, an outright ban on commission is not yet a done deal.
He says: “The DWP will have a different approach to the OFT. The OFT was charged with ensuring consumers are getting value for money. The DWP’s remit is broader in that includes good outcomes across the board, which includes getting people to pay in adequately to their pensions. So it may take a different view.”
Critics will say the industry is being given a very long time to get their house in order, a timetable that will eat well into the auto-enrolment implementation rollout programme. They will point to the fact that Aviva and Standard Life both managed to make their entire back books stakeholder compliant quickly and without too much pain at the start of the last decade.
But even if the timetable is a slow one, it should eventually take the industry to a less dysfunctional place.
Scottish Life managing director Ewan Smith (pictured) says: “Any provider that doesn’t remove the commission-loading in their charging structure will face seeing it move.
“All told the OFT report, sobering as it is, drives the market to a better place. There will be operational pain along the way. But there is a real opportunity here because poor quality providers will not be able to expect to retain what they have.
“The challenge for any provider is to always have a proposition as good as the best. As soon as you let your proposition drop, you will be in trouble.”
There will be many issues to iron out along the way however. The abolition of AMDs for example will create real complexity. Will providers rebroke to the mid-point between active and deferred AMCs, leaving employers and their advisers the job of explaining to existing staff why their charges have just gone up? Or will everyone get the cheaper rate, paid for by the removal of commission? And will providers pass on to consumers every penny they gain if commission is removed?
“Providers will resist moving to anything below 0.5 per cent where there have been AMDs,” says Smith.
The OFT’s recommendations for removing commission, possibly altogether, make discussions about what happens to existing consultancy charging schemes seem almost redundant. Before its abolition there was an academic argument that consultancy charging would have satisfied the OFT because is provider-neutral as it is the consultant that fixes the charge, so there is no incentive to stick with a particular provider. But the fact that it is now outlawed for future schemes means there is no incentive whatsoever for an adviser to move it. That would in all likelihood see consultancy charge schemes treated at least as severely as commission-based ones by the DWP.
But the consultation on the OFT’s findings is likely to see a fightback from the advice community on the value of what it delivers and how it affects overall outcomes.
Thomsons Online Benefits chief executive Michael Whitfield says: “Employer and employee engagement continue to be fundamental to the success of auto-enrolment. The recent LSE research we commissioned found that a clear, and recurring, strategy of communication and open dialogue significantly increases an employee’s engagement level with their workplace pension, and improves personal contribution levels above 4 per cent.
“The emphasis on pension reform now needs to move on quickly from just focusing on low charges to addressing the bigger picture of achieving better pension outcomes for Britain’s savers through sustained and relentless pension education.”