When the Society of Pensions Consultants (SPC) published its report to the FSA from the Consultancy Charging Working Group in March 2011 few would have seen this as anything but helpful to the operation of consultancy charging.
The working party was formed when, quite correctly, the FSA recognised that the corporate pensions market was distinct from other areas covered by the RDR and that it would therefore not be appropriate for the FSA to prescribe the detail of how consultancy charging should work. Accordingly, the FSA decided to establish an industry working group to take forward discussion about the allocation of consultancy charges among members of corporate pension schemes. At the request of the FSA the (SPC) agreed to facilitate the work of this group and to provide its chairman.
The core objectives of the group were as follows; simplicity; transparency; value and flexibility/adaptability. ‘Simplicity’ meant all parties should understand the charge and services provided should be clear, fair and not misleading. ‘Transparency’ meant it should be easy to see what is being paid for what service The service should provide ‘value’ to the employer and member, while ‘flexibility and adaptability’ meant the ability to change should be built into the scheme.
If we see these features as the required constraints to avoid unintended outcomes then we need expand the heading of ‘value’ to include the need to avoid the dilution of the minimum contributions as required under auto enrolment or indeed the treating customer fairly regime as defined by the FSA. This amended constraint then becomes the defining one when considering the optimum business model for giving advice in relation to auto enrolment.
With all these working parts it should have been obvious to government and the regulators that scenario planning was essential if we were not to find problems at the eleventh hour. Despite this it is only recently that the government and regulators have realised that this was not people moaning. We were warning of an unworkable proposition. I personally have raised this issued since the SPC first reported to the FSA as their constraints effectively killed off active member discounts, or what I have always called the “leaver pays all” approach, something that the providers took from the EB consultants who had used it so well in DC schemes.
Returning to the key issue, it is fair to state that in previous articles and whenever interviewed subsequently I have presented the same scenario in relation to who should pay, and for what and posed the question about the fairness of consultancy charging.
My scenario was simple; if you have 100 potential members with only 50 actually joining, is it fair that the joiner pays for the communication costs of those who don’t join, and worse still for the cost of advising his employer. Taking a consumer centric position, this is clearly not fair – the employer should bear the costs for advice that they and the non joiners receive.
The mendacious term ‘free advice’ has played its part – if ever there was a stupid piece of marketing this has to be top of the pile! Despite the obvious long term flaw, many chose to believe that free advice was possible through the seemingly endless generosity of the providers. This concept was then extended to major employers by the EBCs moving to level commissions just as the RDR came into view.
The providers, who are in many cases the major barrier to change, then introduced an attempted reversal of RDR with the promotion of trust-based schemes that fall outside the FSA’s control and also allow for short service refunds – at present. However these ideas will I believe be short lived, especially refunds, as it is at odds with the promotion of pensions to the workforce in general.
So will the DWP and the FCA (it could be the FSA if before 1 April 2013) rule against Consultancy Charging when contributions are at the auto enrolment level?
I would suggest they will they seemed unimpressed by may they met in the recent meetings they hosted, particularly those who took a less than member centric approach when defending the need for consultancy charging to go ahead.
This error in strategy could be fatal – for more than consultancy charging.