It is no exaggeration to say that the world of corporate pensions advice has been shaken to its foundations in recent months.
While the industry has been getting to grips with auto-enrolment, the Government and regulators have combined to tear up the rulebook by retrospectively banning consultancy charging for auto-enrolment and imposing a new cap on DC scheme charges.
When you add in the radical changes to pensions income rules proposed in the Budget, these measures have combined to fundamentally change the relationship between pensions providers, corporate advisers and the employers who have relied on these companies for the their employee pension schemes.
Although the cap on charges does not kick in until 2016, Aviva recently stole a march on its commercial rivals and set the benchmark for how providers are going to implement the new charging restrictions.
Last month, the company announced it would move all schemes to the 0.75 per cent charge cap from the end of 2014 and would stop paying initial commission from that point.
It will also move all schemes with an active member discount to a single annual management charge, set at the previous active member rate, but it has promised to continue paying renewal commissions until April 2016.
The clarity and early notice of the changes was welcomed by advisers who attended the Corporate Adviser roundtable last month, New Models, New Relationships: The Brave New World of Workplace Pensions, which looked at how the workplace pensions market is reacting to the many changes that have recently been imposed on it.
Capita Employee Benefits head of DC consulting Gary Smith said: “We certainly welcome the clarity. From our clients’ point of view, the biggest challenge they are facing, not just in this space but broadly, is lack of clarity. With new regulatory change coming out almost on a weekly basis, clients are struggling.”
Some other providers have unveiled their plans to meet the new pensions charging rules since the round table event took place. Advisers at the event felt the benchmark set by Aviva meant it will be difficult for other providers to offer significant worse terms if they want to compete in the market.
Jelf Group head of employee benefits Steve Herbert said: “If providers are serious about staying in the market, I can’t imagine anyone is going to do anything other than leveling downwards. Maybe there will have to be a mid-point but I can’t imagine anyone is going to go up.”
Better workplace pensionsThe move to make the active member charge the standard charge is also expected to result in increased competition between providers, although Aegon has said it will charge a small number of employees and former employees a monthly admin fee to compensate for the loss of revenue from bringing deferred members down to the active member price.
Premier Benefit Solutions director Martin Thompson said a recent situation saw a provider try to move a client’s scheme charges to the mid-point between the active and deferred member charge.
“This was pre-DWP announcement on charges. We threatened them with a market review, they still didn’t budge. We went to the market review, they budged immediately. Market pressure means if it is a decent scheme they are going to have to go to at least a matching position,” said Thompson.
Aviva head of corporate distribution Malcolm Goodwin said the decision to announce the changes to the their charges as quickly as possible was partly influenced by the need for employers to get advance warning so they could budget for the costs of advice for their pension scheme in next year’s expenditure.
Goodwin said: “If you are having to go back and change the servicing arrangement with an employer, they need to put a certain amount in their budget, whether that is next year’s or this year’s budget. Coming out as we did now means you have got at least six months notice that says you need to plan for this in next year’s budget.”
The move to explicit fees for intermediary services is expected to cause a significant change in the relationship between advisers and providers. Advisers with strong relationships with engaged employers say they expect to see little impact from the elimination of commission but unengaged employers or ones already feeling the burden of extra pensions costs due to auto-enrolment are looking at trying to cut out the adviser and go direct to the providers.
Cullen Wealth director Karen Robinson said: “My experience is that a number of employers will be reluctant to pay, so if that is the case we will have to resign.”
In a sign of how the changes to workplace pension charges are changing the tradition relationship between advisers and providers Aviva distribution director Brian Gabriel said the company is already seeing large number of companies approach it directly in a response to being asked to pay their existing advisers a fee.
Gabriel said: “We are seeing a marked increase in the number of employers who are getting in touch now – we are talking about scores a week – who are saying two things, either ‘I can’t remember who my IFA is – he is either dead or rubbish, and I have heard about this auto-enrolment thing’. Or they are saying, ‘I have spoken to my IFA and he now wants me to write a cheque out. Can you help me?’”
Aviva says it is happy to take on orphan clients and take new clients on directly but it says employers which expect to see no explicit cost will be in for a shock. Aviva also says it will provide information and administration but is adamant it will not offer advice.
Goodwin said: “The cost is about £2,500 for basic guidance and we will not do much beyond that. So if you do start to stretch into advice we say no.”
Robinson reported she has already seen clients decline her advice to try and get the same service free of charge from the provider only to come back when it sees costs still apply.
One section of the market which is expected to feel the impact of the removal of commission particularly harshly is large number of IFAs which have only one or two GPP schemes but which make a disproportionately large amount of their income from the commission paid by these schemes.
Gabriel said: “There will be, I would imagine, hundreds of IFAs around the country whose entire business model is propped up by a couple of GPP schemes which were sold 10 years ago. That is where it really bites.
I don’t know what the number is. I would say a significant number of IFAs that will struggle to operate.”
The changes to pensions regulation, including auto-enrolment as well as the recent charge cap and removal of commissions, is also changing corporate attitudes to providing pension schemes.
Some advisers feel the increase in costs caused by the removal of commission and the standardisation of pension schemes under auto-enrolment is putting some employers off paying for advice.
Robinson said: “The employer is actually facing increased costs because of pensions being imposed. It is not a great economic climate out there, so I think our greatest challenge on the corporate offering is we are assuming the employer will pay a fee and I think that is going to be a massive challenge.”
She suggested we may see a return to the situation that was common in the 1980s where higher earners received pensions advice in the workplace but the majority of employees only received basic information.
However, Thomsons Online Benefits consulting director Matthew Gregson said the increase in costs were coinciding with an improvement in the economy and that many companies would start to increase their discretionary spend. The question is whether companies would be looking at using a traditional model of engaging with their employees or would start to look at using technology to bridge that gap.
Gregson said: “Thinking we will go back to a place where they will want to spend money on individuals talking to individuals I would say is a model that would not necessarily suit most employers given it is the 21st century and we are coming out of recession.”
JLT Employee Benefits director Mark Pemberthy said he expects to see a split in employer’s attitudes to their spending on pensions with some companies seeing little value for money, while others will see it as a way of adding value to what is now a standard benefit.
“Some employers will look at benefits as a mandatory compulsory spend and they won’t want to pay fees for that if there are compelling direct options. But some will want to be more strategic, whether it is a broking relationship, a benchmarking relationship, they will have legacy benefits they want to maintain or develop. That is really where the corporate advice market will continue to flourish. But it will retrench from those employers who haven’t had to pay explicitly for services so far but now have to and are now asking themselves ‘is this value add or isn’t it?’, and if it isn’t, then they will be orphan clients,” said Pemberthy.
Advisers who are going to be badly affected by companies choosing to go direct or at least dispense with their adviser are likely to come from businesses that have not disclosed the costs of their services up to now.
Thompson said: “It is about providing employers with what they want. If you provide them with a service they will value it and they will pay for it. If you have relied on the fact you haven’t had to talk about fees and value previously because you have just received the money, you are going to struggle as they have had it for free.
The move to make active member charges the standard member charge does raise some concerns about the leveling down on the standard of pension service offered to members.
Gregson said: “If we think about where value is, if we have learnt anything it is that a low AMC isn’t a thing to drive a good member outcome. A low AMC is going to disengage and disenfranchise many people, therefore one of the stated ambitions of the government is not going to come to fruition.
“But if we can convince an employer that driving an AMC down they should see as an opportunity to re-engage, then I would say we can deliver the right message.”
Another issue is whether companies can routinely offer pensions for auto-enrolment that have higher charges than a provider’s default scheme.
Herbert said this would not be allowed to go on for very long: “If you look at the wording of the charge cap consultation, it says it accepts that some schemes do not have a default fund, so it would apply to the fund that has the most members in it. So they are already hedging around the fact that some schemes don’t have a default.”
Aviva head of policy for pensions and investment John Lawson said providers will be working on developing one size fits all strategy that was able to accommodate the various different options that will be available for taking retirement income in future.
Lawson said: “We probably will have a single default in future, but we will try and construct a default that covers all the bases, so it is suitable for people who are buying annuities, people who are taking cash, people who are going to stay invested in drawdown.”
However, the ability to offer investment options for some members outside the charge cap will remain valued by advisers and some clients.
Pemberthy said: “We would be disappointed if we were not able to provide investments solutions in DC that were outside the charge cap for members to opt-in to. There has been some fantastic innovation in the market around volatility control funds, a lot of those are not the cheapest, and a lot of those would struggle to distribute in a 75 bps environment.”
Barnett Waddingham associate Martin Willis said: “Value should not be confused with the lowest common cost. People should have the option to use those more sophisticated devices if it is appropriate, but it is a case of making sure they are appropriate and people understand where they are appropriate.”
The conflict between life companies and advisers is growing in the aftermath of the RDR, as more providers look to increase their direct to consumer presence. The changes to pension scheme charges and the rise in direct relationships between employers and firms could be expected to see tensions rise in the corporate arena.
Aviva says it expects its direct business to grow tenfold in the next few years but advisers seem relaxed about this development.
Direct business currently accounts for 1 per cent of new business. Gabriel said: “I would image that would grow to 10 per cent of the next couple of years, but continue to grow.”
However, Herbert said the changes simply reset the market to where it was pre-1988: “There is still plenty of business for both sides. I don’t think it is a huge issue.”
And Smith said: “Going forward the relationship will be slightly different in the way we work and it as we have seen for sometime it will be more of an integration of providers and intermediaries, rather than a them and us environment. It is more about fitting the two models together more, than a black and white approach.”
