The Office of Fair Trading’s report is likely to mark the beginning of the end of all commission within workplace pension schemes. It has recommended that the Department for Work and Pensions review such schemes and few are betting on commission surviving.
Following on the heels of the DWP consultancy charging ban, it looks like even schemes set up before the RDR cut off date could be unravelled.
Some of the direst predictions of the impact on the industry have come from Aviva head of policy for corporate pensions John Lawson who says corporate advisers could lose £150m in annual income with 1,000 advisers losing their jobs. Capita Employee Benefits director of business operations Jonathan Phillips told Corporate Adviser that it would also makes things very difficult for smaller firms.
Lawson expects the pension minister to stand by the recommendations though he is not sure it will actually cut the cost of the pensions being offered. Many advisers say to do so will make that capacity crunch all the more intense.
But there are a host of other recommendations too. The national headlines have been dominated by the OFT warnings about the poorer value of pre-stakeholder schemes amounting to around £30bn and charging around 26 per cent more on average than more recent contracts, potentially impacting 1.4m people. A further £10bn in small schemes is deemed to be at risk of providing poor value through lack of trustee engagement. The Association of British Insurers has agreed to undertake an urgent audit of legacy schemes. Because of this, the OFT says that while it had grounds to refer the industry to the Competition Commission, it had decided not to. The ABI has also agreed to set up independent governance structures.
Of course, the headlines did not report the finding that about 90 per cent of defined contributions pensions passed muster.
The TPR is to review small schemes and the OFT suggests it might be given enforcement powers to ensure they offer value for money.
The OFT is also concerned about active member discounts. It wants to see these removed from market despite industry lobbying though advisers argue this is yet more disruption for employers.
But the OFT did stop short of one key intervention – a price cap that many had expected would bring a return to 1 per cent – an omission that has led consumer organisations to argue that the report does not go far enough.
The commission issue is out to consultation, but most see its demise as inevitable. Indeed Syndaxi Financial Planning managing director Robert Reid says it was always inevitable.
He says: “Those that have based their strategy and in some cases their revenue have a real problem. I have seen business plans based on CC or in force pre-RDR schemes – they have been subject to a direct hit.
“If there is widespread cancellation, depending on timings, some will be outside the clawback period, but for those within it, things could be quite difficult. Pre-RDR there was so much focus on education and not on proposition and on the corporate side there has been no contingency planning.”
Deloitte lead RDR partner Andrew Power says: “There is going to be a push to make sure those commission schemes don’t carry on from here. The question is whether commission just stops or there is a sunset clause say for five years.” He says schemes set up with one or two members pre-RDR that could have allowed commission to be paid on new members are very likely to be stopped.
Standard Life head of workplace strategy Jamie Jenkins says he can empathise with advisers who suffered such uncertainty around charging. But he adds: “That philosophical debate finished when the RDR banned commission. The question is what is the period of run-off? Existing commission is no longer acceptable. It is pointless arguing the principle of it.”
He says there is an acknowledgement by the OFT that some scheme members may be receiving very good value through the advice they are receiving but the predominant model is that members were simply being auto-enrolled. The OFT thought that those schemes were also unlikely to move.
“They recognise there is complexity. They have said we feel strongly about this, but over to you, DWP, to work that through. We don’t want this to run on for many years. We would like to figure out a practical way of doing it.”
Some firms in the EBC market such as Buck and JLT are supportive of the direction of reform. JLT Employee Benefits director Mark Pemberthy says the report reflects 20 years of change in DC pensions.
“Particularly for EBCs, governance, effectiveness of investment strategies, engagement and driving value for scheme sponsors have all been an integral part of what advisers have been doing. It is a catalyst and a challenge to make sure what has been happening in very good DC is happening in all DC.”
Others say the move hurt employers and employees as well as the industry.
Lorica Employee Benefits head of auto enrolment Clare Abrahams says: “There are schemes and advisers that should be looked into. But they are launching something that is going to affect the masses when it should be affecting a minority. It will be detrimental to employers and employees. People will go into AE but they will go in on minimum contributions. The adviser market will fall apart because they are punishing the whole industry for the actions of a few.”
Her firm has set up a scheme for a big national restaurant chain on a commission basis, but this has seen a big take up of the highest matching available and some employees are even putting in more. That is now at risk. “That was a commission agreement so many took up the advice. We couldn’t have offered them that otherwise”.
“There will be cases where bad practice has gone on, yet they have not come up with a solution for identifying those cases. Getting the pension regulator to monitor these schemes would have been a much better approach.”
Buck Consultants head of pensions policy Kevin LeGrand says the firm is supportive of the OFT report overall and that raising the governance standards should help smaller employers and deal with any concerns about an advice vacuum. But he has views about the details of the governance standards.
“The recommendations for governance committees specifically to look at value for money, if established separately, will add an additional level of governance (and cost) to the running of schemes; it is important these recommendations are incorporated into the other governance structures,” he says.
In terms of measuring ‘value’, LeGrand says the OFT is relying upon individual guidance committees to look at their products or schemes, and make value assessments. Whilst this is helpful in trying to avoid a “one size fits all but helps none” situation, driving all schemes down to a low minimum, it will nevertheless present a challenge to assess exactly what is “good value”.
LeGrand adds that the OFT continues the attack upon “small” schemes and this will lead to fewer schemes and encourage industry-wide and multiple-employer schemes.
“This may lead to more efficiencies but it will also dilute the bond between the employer and its employees in respect of this important part of employee remuneration and its use as a recruitment and retention tool”.
PTL managing director Richard Butcher says: “There is a need to promote independent governance. Most lay trustees and employers in contract schemes don’t have the time to get heavily involved. Ramping that requirement up is positive. It may force those schemes into bigger schemes so Master trusts or Nest.”
However he says this should arguably sit with the employer rather than the provider on current plans.
More fundamentally, there is a divide in opinion concerning master trusts. Lawson sees a big threat to their existence. He argues that increased governance requirements around independence will kill master trusts “stone dead”, with the OFT worried whether they would sack the administrator or the investment manager if performance was poor. Lawson’s contention is that they will have to price separately for administration and investment management. He says they are currently priced on the basis of keeping the business for 20 years and the risk they will switch to other investment managers means their model is imperilled.
Firms offering master trusts such as L&G and Standard Life beg to differ.
Jenkins says there is broad recognition that there are gaps in contract-based schemes and potential issues in master trusts and small trust-based schemes.
He says the move is necessary because there may be three quarter of a million micro employers auto-enrolling without an adviser but while the OFT wants potential conflicts addressed it does not want to break up master trusts.
Turning to legacy schemes, Pemberthy says: “It is a huge task but it is right that as we get to a position where know the schemes they are in represent good value for money. From the AE point of view, the staging date becomes a good catalyst to see if the scheme is fit for purpose and the sponsor needs to be aware of that. That potentially means more new schemes will have to be created. But that is a price worth paying.”
Butcher says the OFT have glossed over some difficult practical issues. For example moving people to a clean priced scheme from with-profits could alarm people if they see the value of their fund fall.
He also says that with open providers you can apply pressure if they do not comply but wonders what happens to zombie insurers such as the former NPI. He asks: “Where is their motivation to change? They are not open to new business. The market can’t apply pressure.”
Jenkins says that when the OFT started looking at the market through the lens of AE it looked forward,
but realised you can’t look forward without looking at what has
happened. He says there are people in schemes paid up or still paying, or even due to be auto-enrolled into old schemes.” To auto-enrol people into these schemes would be like going out to buy a new washing machine but purchasing a 1950s top loading version”, he says.
Jenkins points out that Standard repriced its back book some 12 or 13 years ago, as did Aviva.
Power suggests that for providers the big economic issue may not be pre-stakeholder schemes but active member discounts, noting that long standing GPP providers could have a much higher percentage of inactive members who are being charged more than providers that have grown more quickly and recently.
Advisers are divided on the impact of the changes on the capacity crunch.
Pemberthy says: “The staging date becomes a good catalyst to see if the scheme is fit for purpose and the sponsor needs to be aware of that. That potentially means more new schemes will have to be created. But it is a price worth paying.”
Pemberthy adds: “Until we have the confidence that UK workplace
pensions represent good value for members and employers there will always be that challenge of engaging people. Once the headlines have subsided, the OFT’s conclusion should only enhance consumers’ trust in pensions.”
Abrahams emphatically disagrees.
She says: “There is a huge capacity problem but the providers are changing their terms of business. Even in terms of tools they are offering, they are offering them for a lot of money or they have pulled them. The market is changing very rapidly.
“Employers when they are faced with an increasing contribution cost can’t afford to pay for advice. It is at breaking point for a lot of employers and most will end up going to Nest and not be fully compliant in their processes.”
She thinks eventually the new system may have to change again. “It is unsustainable to say employers will have to foot all these costs. It is short sighted. Lots of employers will struggle, firms will struggle and the whole thing will collapse. The ideas are too far out they don’t address the problem and make it worse. The whole market is at risk.” n