The government recently announced that consultancy charging will be banned for workplace pension schemes used for auto-enrolment and the introduction of charge-capping will be considered later in the year.
This will affect contract-based group personal pensions and occupational trust-based defined contribution and defined benefit schemes used for auto-enrolment.
The banning of consultancy charging – essentially member-borne fees – for schemes used for auto-enrolment will become formalised with the passing of legislation later this year. It has, however, effectively come into force immediately with all major providers accepting its inevitability.
It will now no longer be possible for adviser firms to be remunerated through consultancy charging for schemes, either contract-based or trust-based, if they are used for auto-enrolment. Consequently all fees for the implementation and running of workplace pension schemes will need to be accounted for and directly charged to employers.
My expectation is that this move may well be followed by charge-capping for DC default funds once the current Office of Fair Trading report into legacy scheme charges is published this summer. It could be followed by a wider ban on consultancy charging extending to all workplace pension schemes and not just those used for auto-enrolment. Indeed I cannot see any sense at all in our having a system where consultancy charging is allowed for some pension schemes and not others.
The banning of member-borne fees for services provided to employers is something that, in my opinion, should have been seen by all in our industry as an inevitable outcome of the momentous changes of the past few years. There was never any real possibility that the government’s radical overhaul of the state pension system – the most fundamental shift from public to private pension provision ever undertaken – would happen without real safeguards being built in to ensure good outcomes for consumers.
I was one of those who initially criticised the last Labour government for even considering auto-enrolment while there was a strong possibility that many of those about to be swept into pension saving could have lost between 40 per cent and 100 per cent of the value of those pension savings if they qualified for means-tested support in retirement. If auto-enrolment had carried on in the way it was originally envisaged it would surely have resulted in mass opt-outs and our whole pension system would have suffered as a consequence. Fortunately that argument eventually won the day and led to these radical reforms.
The current government, and pensions minister Steve Webb in particular, deserve great credit for ensuring that it will now pay to save for retirement. That is an excellent outcome and one we should all be grateful for, but no one in our industry should have expected that it would end there. People need the assurance that it will pay to save, but they also deserve to be sure that those savings will represent good value for money.
The government has legislated for both value and quality by increasing the future level of the state pension and limiting the effects of charges on employees’ pension pots. Where we are now is exactly what I had always assumed the post-RDR, post-pension-reform world would be like.
In my view the main opportunity offered to advisers as 1.3m UK employers and 13m or so employees move to auto-enrolment will likely come from provision of services for employers and not in recompense for the distribution of pension products on behalf of providers.
The opportunity for savvy adviser firms to change their business models to help employers comply with the duties laid on them by auto-enrolment reforms is great, but will not suit every adviser. But whether they are involved in helping employers manage auto-enrolment or not, all firms will need to accept the new pension realities, and this will extend to the individual pension market as well
Adviser charging remains possible for personal pensions but the future of the market for those other than the self-employed is not at all certain.
Once the auto-enrolment staging dates for UK employers have all been reached every employee in the country will either be a member, or prospective member, of a workplace pension scheme with guaranteed contributions from their employers, or they will be opt-outs. (Employers must auto-enrol all eligible employees into their pension schemes, but employees retain the right to opt-out.) In such circumstances it is hard to see how any meaningful market for personal pensions for employees will exist.
Any market for new personal pensions looks highly unlikely once all employees are either members of a workplace pension scheme or have opted out. If they are opt-outs, any advice to pass the treating customers fairly criteria will need to include a consideration of the outcomes of the workplace pension, bearing in mind the additional contributions from the employer against the outcome of the personal pension pot.
Conversely for members of workplace schemes, any additional pension savings made in personal pensions, which would be allowed under the post-2006 concurrency rules, would need to be justified by their advisers. Issues to be considered include rules that are the same as offered by an employer’s scheme and potential loss of any ancillary benefits accruing to scheme membership. A comparison would need to be made of the respective charges of the alternatives for the member before advice to invest outside the scheme could be justified. The new ‘pot follows member’ rules – effectively automatic transfer of funds on changing employment – for accrued pension pots under £10,000 would complicate this greatly.
While there may be a residual market for top-up pension savings outside workplace pension schemes, in my view it is unlikely to be significant in either size or value. The simple fact is the pension markets that advisers have known for the past 30 years or so, both corporate and individual, will have changed fundamentally and irreversibly.
Steve Bee is founder and chief executive of Jargonfree Benefits
Key points
Consultancy charging has effectively come into force immediately with all major providers accepting its inevitability.
The opportunity for savvy adviser firms to change their business models to help employers comply with the duties of auto-enrolment reforms is great, but will not suit every adviser.
Any market for new personal pensions looks highly unlikely once all employees are either workplace pension scheme members have opted out.