Do insured pensions have a commercial advantage?

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.

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.

For example, under current rules for life products, an adviser can change the fund make-up of the product - to fit it to a client’s updated risk profile for example - and not lose the attached commission. It’s obvious to me why this would be in the consumer’s interest.

Another contact told me insured pensions are relatively common, which suggests to me they could represent a significant amount of legacy trail commission.

I’m not saying legacy trail is a bad thing, but surely it should be an ‘all-or-nothing’ scenario if the regulator’s goal is the elimination of bias?

It’s too easy to criticise a company no matter what stance they take: If they say they are all for keeping trail they are ignoring what is best for the end-customer, and if they are bulk-transferring to clean they are turning their back on advisers.

Perhaps the most important question here is, why can’t they be both? Why are these two so often seen as mutually exclusive?

The FCA was not available to comment.