Clearly many elements of auto enrolment have been a great success. Over 10 million people saving for their retirement for the first time and so far, opt out levels continue to be significantly lower than had been expected, even after the April increases. Hopefully the further increases next April will not dissuade savers.
While the initial prognosis is clearly very positive, I am increasingly concerned that auto enrolment may deliver poor customer outcomes, due to a lack of competition. Compulsion made sure all employees set up schemes. But now they are in place, what is the incentive for those employers to ensure these schemes give their staff good value?
Schemes with thousands of members paying in new money, month on month, to add to growing existing pots should be stimulating a vigorous secondary market where schemes switch regularly, delivering better and better terms for the members. From the conversations I am having around the market, this is simply not happening in any significant volume.
The problem it seems is that there is no vehicle through which an adviser can be paid for conducting a review and negotiating better terms. In removing the ability for advisers to charge fees to the scheme, have we condemned the members to being locked in to moribund contracts where there is no incentive for the pension provider to do better?
My understanding is there is little if any appetite from employers to pay for review fees and with no other way to cover the adviser’s costs there must be a real risk that the auto enrolment market will stagnate.
As AE schemes grow in value they should be attractive and stimulate competition. If advisers can’t be paid, will we see pension providers build their own salaried sales forces to target employers direct? I fear it may only be a matter of time before this happens.
Perhaps the regulator should consider some limited form of advice charge being allowable to contracts where the adviser can demonstrate that they have delivered explicit value to the member. For example, if an adviser could negotiate a significant reduction in the fees charged to the member’s pension, would it not be reasonable for
the adviser to share some of the reduction for a limited number of years.
Many schemes were initially written with 75 bps charges when they were empty shells. Now these have thousands of members with millions invested in the scheme and tens of thousands more coming in each month. The case can be made for lower fees, but this is only going to happen if someone negotiates them and if such negotiation achieved worthwhile benefits for the member; shouldn’t the negotiators be paid?
Obviously value shouldn’t only be defined by price – there may be other ways in which schemes could be enhanced and in that context that should be a method by which remuneration could be agreed.
I am not advocating a wholesale return to commission but if employers are not willing to pay the cost of improving their employees’ pensions, isn’t it better to agree some charging mechanism, perhaps with predetermined decency limits, where a pension provider could be allowed to pay proportionate remuneration, from the charges, for a limited period, where value has been demonstrated.
Another option may be to actually deliver on the much-heralded opportunity to sell group risk cover side-by-side with auto enrolment pensions. This has been advocated countless times over the last five years or so yet with the exception of a small number of advisers who package such arrangements on a case-by-case basis, as far as I could see the idea has never delivered on its potential. This is not helped by the fact that in the current market only Aviva and Legal & General operate in both the workplace pension and group risk sectors, although Scottish Widows does have a marketing partnership with Zurich, following the former buying the latter’s master trust business last year.
With hindsight, killing off commission on workplace pensions has had a significant unintended consequence. The 10 million consumers saving in auto enrolment schemes deserve competitive products but if the current prohibition on adviser remuneration continues it’s hard to see how that will be achieved. This would be a very poor outcome.