There’s no denying that life has been tough in the pensions world over the past twelve months or so. It’s been a white-knuckle ride for actuaries advising final salary schemes, while new business for other professionals has been as rare as a tax credit.
Many actuaries and advisers tell me they have never been busier, but not in a good way. Most of their time is taken up with fire-fighting.
But it may pay to remember the old proverb, which says: “The fire that warms us at a distance will burn us when near.” So what fire-fighting tactics are pensions firms implementing to protect against a double-dip recession?
Perhaps they [finance professionals] should all be called brokers, given that broker is what you are when they’ve
The scale of fees where actuaries are advising final salary schemes is a festering sore for many employers and trustees, and not without good cause in some cases. Justifying the line up of professionals advising some funds, from actuaries to fund managers, advisers and lawyers, all extracting fees, is a challenge on a par with solving the longevity crisis.
Perhaps they should all be called brokers, given that broker is what you are when they’ve finished.
It is hardly surprising, then, that companies and trustees are robustly questioning the value they are getting for these fees, particularly when their own earnings are being squeezed. Which brings us on to firefighting tactic number one: give value for money. That way the client won’t move down market to a smaller and cheaper firm.
This follows seamlessly onto firefighting tactic number two: cutting costs for the employer. Advisers under pressure usually throw themselves energetically, although not particularly imaginatively, into this exercise. I hope they can sleep at night. Their suggestions for cutting costs usually relate exclusively to withdrawing services to employees. But at least their own fees are safeguarded.
There is a full and varied smorgasbord of benefits which can be ditched, at no cost to anyone other than scheme members. The more radical, the higher the fees which can be earned. Encourage early retirements or cash swaps, dilute accrual terms, restructure or close completely and Christmas has come early for advisers. But beware. It might just be a case of turkey’s voting for the trimmings. The tactics used to survive this recession may preclude there being any final salary schemes left to manage when we finally emerge into the sunny uplands.
Meanwhile, and I’m not supposed to mention this, because the Regulator mustn’t get to hear, but some firms are even devising wheezes to help schemes cut their levy to the Pensions Protection Fund.
These include, for example, a cunning plan to get your Dunn & Bradstreet rating up. If they work, and the PPF levy is cut, then the adviser keeps half the saving, I am told.
Low-cost firms providing a professional service are not seeing clients fall-away, but rather are acquiring them. However, others, where fund management or administration has been poor to non-existent are said to be haemorrhaging business.
Worst hit are IFA wealth managers, which means churning, that most unpalatable firefighting tactic, is also back, rising like phoenix from the ashes.
Their new business has fallen off a cliff , crippling companies relying on big upfront commissions. Some firms’ business models were so predicated on regular sales of bonds or single premium pensions at 7 per cent commission, that with no trail to fall back on, they are finished.
The only way to stave off bankruptcy is to go back to existing clients and try to sell them something new. Yes it is unlawful. And yes, the regulators at the Financial Services Authority will eventually catch on. But that will be in about two years time, long after these firms have collapsed.
There’s probably not a firm in the pensions industry that isn’t engaged in some form of firefighting, but this will not be enough to save weaker firms, nor should it. As H G Wells nearly said: ” Firefighting should itself be considered a crime. A number of houses deserve to be burnt.”
Teresa Hunter is personal finance editor of Scotland on Sunday