Commission has been a dirty word in financial services for years now, but advisers operating in the workplace should not be tarred with the same brush as those giving individual advice. Yet we now find that the FSA wants to ban commission on group pensions, regardless of what effect that might have on distribution.
Defending commission is not something I do lightly. Fees are considered the remuneration solution of choice for advisers that see themselves as forward-looking, and I commend that approach. I also accept the arguments that commission skews certain advisers’ recommendations in favour of those providers that offer it. What’s more, if you are an employee in a pension that has been set up on a commission basis, your ultimate income will in all probability be less than if your employer had paid a fee, and offered you a lower AMC.
But in the not too distant future, companies who might have set up a pension but who will not pay a cheque for fees will not do so. For employees this means being in a scheme offering 3 per cent of band earnings in Nest (in fact perhaps 1 per cent until 2017) rather than the contribution on full earnings they would have been likely to receive had the system allowed providers to pay advisers commission to persuade them of the value of putting in a pension.
Turner’s report for the DWP highlighted the market failure in the group pensions market, and you would think that Department would be interested in not doing anything that made things worse. But at an event at the DWP I attended a few weeks ago, its head of personal accounts reform was unable to explain the Government’s position on whether it supported the FSA ban on group pensions commission, a situation that left me astonished. Three weeks later, the response I received was a simple cut-and-paste from the FSA’s RDR paper. I do not believe the DWP has its own position on this key issue.
The problem stems from the issue of matching the shape of the charge with the work done by advisers. In a monocharge world, Consultancy Charging does not work, and consumers will run a mile at seeing half their contributions disappear in the first year. And the consumer press will, rightly, have a field day.
This is the same issue faced by Nest. It is likely to opt for a single charge structure, rather than a 5 per cent upfront plus 0.25 per cent thereafter, even though the latter is the cheaper one to the end user. It wants this precisely because it believes it will get more people saving that way. So it is with the private sector, yet the new rules will not allow this.
We have here a classic Whitehall farce with the left hand not knowing what the right hand is doing. Leaving commission as it is may not be the answer, but banning it outright in the way that is being proposed will only leave members of the public short-changed.
John Greenwood, Editor