The end of June was a busy time for announcements on the future of corporate pensions. On 24th June, the DWP announced a review of Nest and auto-enrolment, which could have significant implications for the surrounding corporate pensions landscape.
The next day, the FSA set out its final rules on how the RDR will apply to corporate pensions. Unfortunately, it’s highly doubtful that this coincidence of timing was planned.
The RDR rules apply to all new group personal pensions (including stakeholder and SIPP) set up after 2012.
To avoid regulatory arbitrage, the rules extend to investment contracts linked to future occupational schemes arranged as alternatives to GPPs. The most significant impact is on adviser remuneration and what that means for scheme and member charges.
As for individual business, commission will be banned on new schemes post 2012. Instead, advisers will agree their Consultancy Charge (CC) with employers. As at present, some employers may agree to pay a separate fee. But current financial pressures mean an increasing number are looking for ’advice’ to them or their employees to come out of scheme contributions.
The FSA recognises the different ’advice’ models that already exist in this market, from employer-only support through to full personalised advice for all members. The CC will be set to cover services to the employer and any general support for members regarding joining. It can also include payment for a pre-agreed level of personalised ’advice’ to members, although here, the ’personalised advice’ part can only be charged to those who decide to take it.
If the member wants a personalised service beyond what the employer has agreed to within CC, this needs to be paid for through a separate fee or Adviser Charge.
As in the individual retail market, the FSA is banning ’provider factoring’.
The FSA has clearly based its RDR decisions on the assumption that autoenrolment and Nest will provide a solution for small, unengaged employers
This means when providers are instructed to pay CC to advisers, they must at the same time deduct matched amounts out of contributions or members’ policies. This is problematic if the employer isn’t prepared to pay a separate fee and the adviser wants to be paid up front. At the extreme, member contributions for the first few months could be wiped out entirely! What’s more likely is that advisers will spread their remuneration over the first year or two, reducing the level of initial charge to avoid discouraging take-up. The FSA has hinted that it won’t balk at charges of up to 35 per cent of first year’s contributions – but we need to ask how members might react to this.
While the FSA rules are final, they don’t give all the answers. There is to be further discussion over the summer on how to fairly allocate total scheme CC between members. Should the member charge vary with level of contribution or term until retirement? What about members who join in future years? These are complex questions.
Importantly, commission-paying schemes in place before the end of 2012 can continue on a commission-paying basis after 2012, including for new entrants and increments. This is welcome as any other approach would have left pre- and post-RDR members within the same scheme subject to different charges. This complexity would have prompted switches and restructures, often with no member benefit. The FSA rules give advisers a bit more clarity over the best way to advise on corporate pensions in future. The key is to make sure any scheme set up from now on is on a basis that’s sustainable beyond 2012, allowing for both RDR and pensions reform. This includes making sure the remuneration approach adequately covers future services – the FSA is on the look-out for inappropriate switching behaviour.
On the other hand, the DWP review of auto-enrolment and Nest makes things somewhat less clear. Which employers will be impacted? Which members will be auto-enrolled? For whom will Nest be the right future choice? Will Nest even proceed? The FSA has clearly based its RDR decisions on the assumption that autoenrolment and Nest will provide a solution for small, unengaged employers.
If we see any major pension reform changes, some of the detailed RDR implementation issues for corporate pensions may need to be reviewed.
With so many regulators and legislators involved in the corporate pensions space, we’ll always have to contend with these types of interactions.
It just makes it all the more important that DWP, FSA,TPR and EU regulators keep focussing on the ultimate aim – creating an environment that means more people, with their employers’ support, save more for retirement.