It takes a brave person to forecast the outlook for the corporate pensions market, as ongoing regulatory reviews and proposed reform are creating a dense fog over the sector’s future. But few are betting on things being as they are now in 2012.
The FSA consultation on charging and fees in the retail market via its retail distribution review (RDR), coupled with the government’s stuttering proposals for auto-enrolment and a system of personal accounts, have made it decidedly difficult to predict the forthcoming structure for group personal pensions.
However, product providers and financial advisers have little choice but to ready themselves for the inevitable changes in this sector, and adjust their business models to meet new regulatory demands.
The FSA closed its consultation on the corporate pensions element of the RDR at the end of July, and since then the industry has started to make its position clear on the watchdog’s proposals.
Much of the focus has been on outlawing indemnity commission – which would ban advisers receiving an upfront remuneration from product providers in return for a recommendation – with many in the industry welcoming the move.
Noel Birchall, national consultancy manager at HSBC Actuaries &Consultants, says: “Whilst commissions have been useful in delivering low cost pension solutions to employers and their staff, they have – to an extent – masked the value of the service we provided. If a commodity is not paid for, how can it be properly valued?”
Birchall says his firm is engaged in discussions with employers about services and costs, and is offering them the option of a fee only basis or offsetting commissions against fees payable.
Several providers including Standard Life, Friends Provident and Axa, have ended commission payments, citing a preference for fairer and more transparent remuneration structures. However Aegon Scottish Equitable has made clear it does not want to see a wholesale ban on commission, arguing it still has relevance to the corporate market.
Adam Potter, head of corporate pensions sales at Aegon, says: “We are pro commission and believe it has a place in the corporate pensions business. We are very worried about the RDR and think it will be to the detriment of the consumer if commission is outlawed.”
Potter argues that many individuals received financial advice by virtue of being in an employer pension scheme and are happy to absorb the cost as part of their overall fees. However, if the charges for advice are made more transparent, Potter questions whether employers will be willing to cover the expense.
“If [the cost of advice] becomes very explicit in the market and the employer is writing a cheque out, he is only going to write a cheque for what he really wants to do. If he doesn’t want to pay for engagement for his shop floor workers then he won’t pay for them.” He adds:  “Because of the way the commission-based model works, a lot of the advisers engage directly or indirectly with employers and employees. This happens a lot more than the FSA probably realises.”
Potter’s assertions are in some way borne out by research from the Association of Independent Financial Advisers (AIFA) which found 71 per cent of IFAs offered advice to individual members of GPPs.
Scottish Widows joined Aegon in expressing concern about the abolition of commission, although its opposition rests with the FSA’s suggested alternative remuneration structure. The watchdog proposes replacing commission payments with ‘adviser charging’, which would make the recipient of advice responsible for paying fees rather than the product provider.
Robert Kerr, head of distribution development at Scottish Widows, says the problem with this approach lies in attempting to apply regulations to GPPs that were originally intended for the wider personal pensions market.
He says: “Essentially the corporate pensions market is different from the single premium investment market on which the RDR proposals were based, so there are different dynamics that need to be looked at.”
Kerr argues that the adviser charging proposal considers the individual member to be the customer rather than the employer, meaning each member of the GPP would have to negotiate a fee with the IFA if they want to receive financial advice. Such a situation, Kerr believes, will dilute the employer’s bulk buying power and increase costs for consumers, particularly if the employee changes job and joins a new workplace scheme.
He says: “This undermines the economics of the group market where employees typically benefit from a lower charge when compared to an equivalent retail savings vehicle.”
Financial advisers, too, have concerns about the suitability of adviser charging for the GPP market. Robin Hames, head of technical marketing and research at Blufin Corporate Consulting, agrees that it is the employer who should be seen as the customer rather than the individual member.
“Adviser charging, as outlined in respect of individual advice, does not fit the context of advice given to employees regarding participation in a group personal pension scheme. GPPs are in effect employee benefit/company pension arrangements and this means that employers take the key contractual decisions normally assigned to the individual,” Hames says.
As an alternative to adviser charging, the FSA is also considering arranger charging which would apply to GPPs where advice is not given to employees. Any intermediary remuneration would be negotiated between the adviser and the employer, and be disclosed to members alongside the usual key features document.
Scottish Widows supports such an approach because it restores the employer as the main customer rather than the individual employee.
Kerr says: “We believe it is the employer who is the sophisticated buyer in [the GPP] market as opposed to the member. The employer is used to buying services and can negotiate in the best interests of employees.”
Whether adviser or arranger charging emerges as the preferred remuneration structure for the GPP market, advisers must be prepared to make clear precisely what members are paying for and why. Hames suggests consultants be obliged to provide clients with clear terms of engagement outlining the one-off and annual services, and the fees for each. He adds that where a client does not wish to meet all of these costs by way of a fee, the two parties should then be allowed to disclose the agreement to insurers and negotiate the terms and remuneration which the provider is prepared to offer as new business acquisition costs.
Hames notes: “This would provide absolute disclosure to all parties and allow for a very wide range of possible remuneration structures.”
Factoring is another contentious area for those operating in the corporate pensions space. Although the FSA has not asked for specific feedback from the industry on the impact of outlawing this practice for GPPs, providers and advisers are anxious that the watchdog exempts workplace pensions from the ban.
Again the issue lies in applying rules which make sense in the personal pension to the considerably different corporate pensions market. Advisers and providers believe that banning factoring, which allows members to pay for advice over an extended period, will drive individuals away from retirement saving.
Andrew Strange, director of policy at AIFA, says: “Factoring is being assessed as part of the wider RDR but it has a very specific impact on regular premium business. This area is fraught with potential problems.”
Scottish Widows and Aegon have both raised objections to the abolition of factoring, arguing that if low earners or those who plan to be in the pension scheme for a short period of time are forced to pay hefty adviser fees up front, they could well be put off from joining the plan.
Kerr states: “From the perspective of a product provider, [deducting the cost of advice at time it is provided] clearly provides a more efficient use of capital. However, if it means that employees are more likely to opt out of regular savings through workplace pensions because of lack of engagement, this would be counter-productive.”
Instead, Kerr believes a compromise exists where the costs of advice can be recouped over a maximum period of time, possibly five years.
Aegon also calls on the FSA to allow factoring to continue, going one stage further and calling for it to be permissible for all regular premium business. The provider argues that leaving factoring in place not only benefits members but means providers can recoup advisory costs more quickly and reduce persistency risk.
Duncan Howorth, chief executive of JLT Benefit Solutions, suggests that in the absence of factoring some employers may choose to take credit from providers to cover the upfront cost of advice. The providers could then recoup the debt over an agreed period via the plan’s investments.
“We might see some credit come back into the system. In other words the client borrows money from the provider to pay for the advice and the provider will recover that money from the investments or from premiums,” Howorth says.
The advent of personal accounts and auto-enrolment, which was scheduled for 2012 but the full implementation of which may yet be pushed back to 2016, will also impact on charges in the GPP market. The FSA concedes that even it doesn’t know just how the nationwide system of workplace pensions will work, but recognises it will have a role in regulating the new regime. For example there will be circumstances where advisers can justify recommending employers establish GPPs as an alternative to personal accounts, but the regulator will be watching for “more questionable” recommendations to employers such as proposing a GPP that is more expensive than personal accounts on the grounds of wider investment choice, something which may not be necessary for many employees.
The FSA states: “We want to be confident that our rules protect consumers in such situations and reflect the eventual charging structure of personal accounts.”
So where does this leave the corporate pensions advisory and provider community when it comes to charges? According to AIFA’s Strange, they are still largely in the dark.
“It is too early to say how personal accounts will impact fees and charging, and we still have a general election to get through. It’s difficult to predict where this will go,” he says.
The next six to 12 months will be a tense waiting game as players anxiously anticipate the impact of major regulatory and legislative change on their operations. For some IFAs the burden has already proved too much and they are considering exiting the market.
Sheriar Bradbury, managing director at Bradbury Hamilton, says the looming deadline for implementation of the RDR will have prompted many advisers to question their choice of profession, adding: “In weighing up the pros and cons perhaps they even went so far as to compile a list of the reasons for staying in the advice market and the reasons for packing up and leaving, I imagine at the moment the latter would be the considerably longer list.”
JLT’s Howorth agrees that the adviser market will experience consolidation, but he questions the sector’s track record in successful acquisitions and also notes a lack of capital in the market which may hinder takeover deals.
He says: “The worry is that the sector does not have much in the case of track record for successful consolidation players. You have also got to ask where the capital is going to come from to allow this consolidation to take place. One source is the product providers themselves but that hasn’t been a terribly successful story for those providers as shareholders. The question is how will the IFA market shrink, particularly among those wanting to carry on acting in a fully independent way.”
For those firms offering a wide range of services and who aren’t reliant on commission as a sole source of revenue, the outlook is brighter. Bluefin, for example, believes its diverse range of business streams will allow it to “adapt and thrive in a post-RDR environment”, while JLT, Barnet Waddingham and HSBC are generally positive about the changes.
However, there is no doubt that the wider industry is unwilling to accept the RDR proposals for the corporate pensions market in their entirety. And as the uncertainty persists, businesses must live in hope that their responses to the FSA do not fall on deaf ears.