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Advising in a low-margin, low-contribution world

This article is part of
Guide to workplace pensions

Advising in a low-margin, low-contribution world

Margins on workplace pension advice are under pressure, so how can you engage corporate and individual clients and make them realise the value of advice?

Cost has always been a consideration, whether from an employer worried about the bottom line, an employee wondering how to make ends meet or an adviser spending hours of work for little return.

Employers are always looking to cut costs. Kate Smith, head of pensions for Aegon, comments: “It all comes down to affordability.”

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For the employer, however, cost should not be the primary factor, as Dale Critchley, policy manager for Aviva, explains.

“There are a range of auto-enrolment (AE) providers to choose from, some costing more than others, some delivering greater benefits than others.

“Employers may be tempted to adopt a least-cost option but that could be a false economy if it provides a benefit that is not valued because the employee experience is poor.”

Chris Daems, director of Cervello Financial Planning, explains: “It’s fair to say many smaller businesses are unwilling to pay for a consultative advice lead solution.

“Smaller businesses will use more streamlined technology-driven solutions, but we have found there is still a market for consultative support.”

For employees, the benefits of having a contributory scheme in which the employer matches or exceeds the initial investment, plus the tax-efficient boost to the money, should outweigh the expense considerations.

But for advisers, the situation is a little more complicated.

Costs and considerations

Throughout the roll-out of AE, there has been significant political pressure to push down the cost of advice, as well as the cost of managing the underlying funds within a workplace pension.

In April 2015, the Department for Work & Pensions issued the document: The charge cap: guidance for trustees and managers of occupational schemes.

This outlined the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which took effect on 6 April 2015.

From that date, the default arrangement within certain pension schemes used by employers to meet their AE duties will be subject to a cap on the charges which may be borne by scheme members.

The charge cap is 0.75 per cent of funds under management within the default arrangement, or an equivalent combination charge. The cap applies to all scheme and investment administration charges, excluding transaction costs and a small number of other specified costs and charges

Only three types of charging structure may be used in the default arrangements of qualifying schemes. These are subject to different but broadly equivalent charge limits:

1) A single percentage charge – capped at 0.75 per cent of funds under management

2) A combination of a contribution charge plus a percentage of funds under management charge. Permissible combinations are shown in the table:

Contribution percentage charge rate %Percentage of funds under management rate %
1 or lower 0.6
Higher than 1 but no higher than 20.5
Higher than 2 but no higher than 2.50.4