Do insured pensions have a commercial advantage?

Michael Trudeau

It’s starting to look like pensions and investments technically classified as insurance products could have a commercial advantage over other identical products because they can keep paying out legacy commission to advisers as long as the investments remain undisturbed.

When the Financial Conduct Authority came out with its most recent platform paper which finalised the incoming ban on cash rebates, it said it was also looking at extending the rules to include what it called “adjacent markets”, namely self-invested personal pensions, execution-only brokers, discretionary fund managers, and - most importantly for the purposes of this article - life companies.

There are two PR spins companies can put on this, depending on their stance: Either it’s good for the consumer or it’s good for the adviser, or at least that seems to be the dichotomy which was emerged.

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After the FCA published its paper, wrap platforms and fund supermarkets alike began announcing their intentions. Several said they would bulk-transfer clients into the new clean share classes.

Skandia came out saying it would keep legacy commission in place as long as it could, until 2016 “at least”.

Wait, back up a second. What does the rebate ban have to do with commission? Well, according to Skandia, legacy commission payments are funded by rebates from the product providers. Without cash rebates, it becomes commercially unfeasible to continue paying out legacy trail.

So, in 2016, when the rebate ban comes into effect, legacy trail evaporates overnight. Apparently, the other big platforms use the same funding model so this will happen elsewhere as well. In theory.

Now here is where it gets interesting. Skandia also notes in a press release on its website that trail commission for pension and bond investors in its bundled platform pricing model can continue past that date. How you ask? Well, these particular products are administered by Skandia MultiFunds Assurance Limited, its insurance arm.

Because these are technically insurance products they fall outside the rebate ban and can therefore continue paying trail.

But doesn’t this seem a bit unfair? I want to be clear here; Skandia isn’t doing anything wrong. However, it does suggest an artificial un-level playing field.

Surely an adviser would be less inclined to move a client’s assets out of a product that still pays trail?

The FCA has said it expects commission to trail off (little pun there) over time, but why not just ban it outright if it created a lumpy marketplace like this?

One adviser I spoke to said: “The Skandia SIS pension and bond in particular are no different to other uninsured wrappers on Skandia and other platforms. [They are] directly invested in underlying funds, offered through the same online service and pricing structure.

“What is the rationale for allowing them to be excluded from the 2016 deadline?”

Mike Barrett, Skandia’s platform marketing manager, told me that choice is the most important consumer outcome, and in some cases with these products the preferred choice would be to leave commission in place.