The Department for Work & Pensions has released a second consultation on options for banning member-borne commission payments in occupational schemes used for automatic enrolment.
Today’s (26 January) paper partly forms a response to its October consultation on banning consultancy charging in workplace pension schemes, ahead of the sunset clause on all such payments coming into force in April.
The government is looking for responses from third-party administrators, independent financial advisers, trustees and managers of schemes by 9 February on whether the draft regulations proposed meet the policy decisions set out.
As previously reported, the regulations will sit alongside corresponding Financial Conduct Authority rules and help to ensure members are not enrolled into workplace pension schemes used for automatic enrolment where the members are charged for commission payments to advisers.
The Pensions Regulator welcomed its new role, subject to parliamentary approval, to enforce the ban directly on service providers, including issuing compliance notices and fines.
Its executive director for regulatory policy Andrew Warwick-Thompson commented: “We will expect service providers to comply with the ban on qualifying schemes being used for automatic enrolment, and we will be issuing a number of direct communications to relevant groups in the coming weeks to educate them about our expectations.”
October’s consultation suggested two main options:
• Option A - placing a duty on trustees to ensure that members are not charged for the cost of any commission payments to advisers in relation to any new commission arrangements; and to use their best endeavors to remove any such existing member-borne commission arrangements in these schemes; or
• Option B - placing a duty on service providers to prevent members being charged for the cost of commission payments to advisers in relation to any new commission arrangements; and to remove any existing member borne commission arrangements in these schemes.
In terms of the first option, there was consensus among respondents that as trustees were typically one step removed from commission arrangements between advisers and service providers, it was unlikely that they would be aware of the presence of commission in their schemes.
Respondents also highlighted that as trustees were not party to the commission contract between the adviser and the service provider, it would not be reasonable or possible to hold them solely responsible for removing commission charges on members from schemes they are managing.
Others suggested Option A would needlessly add complexity as trustees would not be able to discharge a responsibility to remove commission charges on members without the involvement and cooperation of service providers.
In terms of Option B, almost all providers who responded felt they were best placed to prevent and remove charges on members used to recover the costs of commission paid to advisers in occupational schemes.
However, while the DWP acknowledged that its original proposal may result in additional burdens for some providers, the complexity of making regulations to ban existing commission arrangements means that they are unlikely to be resolved in time to make and lay regulations to come into force on 6 April.
Jamie Jenkins, head of pensions strategy at Standard Life, explained that this consultation seeks to bring trust-based schemes in line with their contract-based counterparts in banning commission where the scheme is being used for auto enrolment.
“Enforcing the rules is slightly more difficult due to the additional role of trustees, who are not usually party to the contract with the adviser. In practice, however, there were few trust-based schemes set up to pay commission, and we would expect all providers were preparing to remove it anyway.”
The government also stated that it sought to strike a balance between making effective regulations that protect members, while minimising regulatory burdens on industry.
“In line with the approach taken by the Financial Conduct Authority, we do not propose stopping service providers from using member-borne charges to recover the cost of initial commission paid before the regulations come into force,” read the consultation.
“In addition, we will not regulate for providers to reduce member-borne charges when existing commission arrangements are removed. However, if we see that members are not benefitting from the removal of commission arrangements we will take action.”
Steven Cameron, regulatory strategy director at Aegon, agreed that it’s right for trustees to be given responsibility for notifying the provider if the arrangement they are administering is linked to a scheme being used for auto-enrolment.
“It’s also right that providers then take responsibility for bringing the scheme into line with the commission ban. In most cases, the key driver for change is complying with the charge cap which in most cases would have required commission to be removed in any case.”
peter.walker@ft.com
