Advisers who distribute group pensions on a commission basis and employees who benefit from them are being sacrificed because the FSA is unable to figure out a way of insulating the individual market from that in the workplace.
Nobody is denying that distribution of workplace pensions will be choked off by the proposals contained in last weeks Retail Distribution Review. But thats ok, say the supporters of a ban on commission and factoring, because we have got personal accounts to fill the gap. Personal accounts are being set up, as a second-rate alternative to group pensions, because of a market failure in the distribution of corporate pensions. The RDR is going to exacerbate that market failure by reducing the number of advisers and providers operating in the workplace.
Yet the RDR also claims to be addressing market failure. Which market failure is the more important? The fact that employers, in what is after all a business-to-business transaction, do not know how much commission their advisers are getting? Or the fact that some employees who might have been in GPPs group stakeholder arrangements will in future have to rely on the tiny pensions promised by personal accounts?
It is correct that there is a market failure in the provision of group pensions to lower income individuals – many providers will not even bother to quote for small, low salary schemes. The FSA paper also shows quite clearly that commission has distorted the market.
But what it has not done is demonstrate that there is a risk to consumers as a result of this bias. Nor, inexplicably when you consider that this is the issue it is addressing, has it been able to identify the proportion of business written on a commission basis. Nor does it elaborate on the risk to consumers of providers not being able to distribute to employers who will refuse to pay a fee. The Government will argue that this does not matter because there is personal accounts to pick up the pieces, but that is only for band earnings, and for 8 per cent of salary at that, and for some employers, only from 2017.
The CP also seems inaccurate in its figures with regard to the state of the market. Nobody believes that 91 per cent of the contract-based group pension market is distributed through IFAs.
I am also bemused at the FSAs logic that one of its reasons for banning commission is because the current model is not sustainable. Surely that is for market forces to determine – not a civil servant in Canary Wharf.
I am yet to detect any sense of rebellion or resistance to these changes.
The ABI supports the abolition of commission, and so do all but those providers still offering it. The rejection of factoring, on the other hand, has met more resistance. I am yet to be convinced that an industry-wide factoring arrangement would be any more of an intervention into the free market than a stakeholder price cap. Part of the problem is that the industry has become so focused on level charges. The idea of 5 per cent of contributions over the first five years sounds horrendous to anyone used to 1 or 0.5 per cent.
But the idea that such a model could work out cheaper over the life of a pension is yet to gain ground. If the figures can be made to add up in favour of the consumer over the life of a plan through factoring, that case should be pressed more forcefully.
And in any event, market forces should be allowed to drive the choice between personal accounts and factored group pensions. Some employees in a 5 plus 3 per cent scheme might be better off in personal accounts charging an amc of 0.5 or 0.6 than in a scheme where 5 per cent of contributions of the first five years contributions are lost. But others, particularly higher earners, will not. Has the FSA researched employers attitudes to paying a fee?
The reality is that the RDR is being applied to the group market because the FSA says it cannot stop IFAs selling group pensions to individuals. How convenient. Surely they can pass a rule saying the RDR does not apply where there is an employer/employee relationship, a concept already very well defined in tax law. The FSA is also worried that IFAs doing individual business will start doing more group business if that is where the commission is. Great. That would actually help the market failure in the distribution of workplace pensions.
The fact is that some employees will now get worse pensions than they would have on account of this heavy-handed regulation. That is a shame.
John Greenwood
Editor
Corporate Adviser
