‘Half of advisers to exit the market’ might be putting it too strong, but the corporate pensions advice is in the midst of a seismic revolution. While auto-enrolment may look like the biggest challenge facing corporate advisers in 2014, for many that have relied largely on commission, the bigger threat is retooling their business for a new, more austere world.
The OFT workplace pensions report published in the autumn, coupled with the DWP consultation on commission that followed it have created serious cracks in the foundations of the old world order. Now an increasing number of commentators are talking about serious fallout from the corporate advisory community if and when the commission tap is turned off.
While there is still much to be worked out on the detail of how commission is to be dealt with, the long term trend is clear. A recent report from Cass Business School’s Pensions Institute, VfM: Assessing value for money in defined contribution default funds argued that corporate IFAs will face a pincer movement from both the removal of the traditional commission income stream and a reduction of choice, with the market contracting around five or six major trust-based multi-employer schemes.
The report says: “Former commission-based corporate advisers face an uncertain future. From mid-2014, ‘disintermediation’ will be the hallmark of scheme distribution, with employers increasingly seeking solutions from the major master trusts. SMEs with no pre-existing scheme are likely to tackle compliance mainly through payroll – rather than pension – solutions.”
The Pensions Institute predicts that fierce competition will result in only five or six major trust-based multi- employer schemes by 2020. Rapid consolidation among providers could lead to market instability and the sale of pension books to uncompetitive consolidators. But the upheaval will also mean “many employee benefit consultants and corporate advisers face an uncertain future in the market”.
Some life office sources are talking about some corporate advisers losing two thirds of their revenues on account of the changes, with the average firm losing a third. Gallagher Employee Benefits chief executive Tim Johnson puts the figures at nearer a half and a quarter of revenue respectively.
Aviva head of policy John Lawson predicts many firms will lose half of their revenue, with this feeding through to a cull in the number of RIs.
Lawson says: “Our estimate is that half of employers will refuse to pay a fee. The other half will continue to pay fees. So for corporate advisers, that means finding an alternative revenue stream. Auto-enrolment is what employers want help with, and there will be more interest in risk benefits and flex, but they will not want corporate wrap.
“For the advisory firms themselves they may be able to recruit people with the skill sets to make this transition, but for the RIs themselves it will be more difficult. Their skill sets are in comparing pension providers and investments. Auto-enrolment is about project management, extracting data and making sure everything works as it should. People who do this will probably be on a lower pay grade, so this could be problematic for RIs.”
The Pensions Institute believes providers will increasingly deal directly with employers, although they will not advertise the fact to advisers.
The report says: “The key distinguishing feature of life offices is that they have traditionally sold their schemes through EBCs and corporate advisers. This will continue to be the case under auto-enrolment, although we understand that some providers will also accept employers directly. Where they do, they might not advertise this fact openly, as they are anxious not to alienate the advisers on which they rely for the bulk of their business.”
Lawson is frank about the extent to which Aviva expects to deal with clients direct. He says: “If half of employers say they don’t want to pay fees, we expect them to deal with us direct.”
It is a perspective shared by Barnett Waddingham partner Mark Futcher. He says: “That figure is certainly too high for us. Many of our clients have come out of a trust-based world and value the governance we give over the contract-based solution they have gone for. But yes, across the industry, a figure of 50 per cent of employers refusing to pay charges is not unrealistic. And for consultancies where the model has been taking up-front commission and then doing no recurring work, the figure will be even higher.”
Standard Life head of workplace strategy Jamie Jenkins is less pessimistic. “I think les than 10 per cent of schemes will operate directly with providers. I think employers will reflect on the fact they are being asked to pay a fee and then, once they realise the complexity of what it is they have got to do, decide it is worth paying for. Going direct to a provider does not replicate the services you get from an adviser.”
It is often said that predictions of the demise of financial advisers are always overdone. In the individual advice sector, similarly dire predictions have yet to materialise. Last March Ernst & Young predicted around 12 per cent of IFAs would fall by the wayside in 2013 as a result of the RDR, a fall of around 3,000. But FCA figures published earlier this month show that financial adviser numbers actually rose 1 per cent in the second half of 2013, although there was a bloodbath in bank and building society advisers over the period, where there was a 23 per cent fall, taking numbers to half their 2011 level.
For many RIs, 2014 will market one of the biggest challenges of their careers – at least auto-enrolment offers a massive opportunity for carving out something new.